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Asset Transfer Orders in Aid of Prejudgment Remedies Against Out-of-State Defendants

Good news: the District Court in your diversity case has granted your prejudgment remedy application under Conn. Gen. Stat. § 52-278a et seq. and the defendants have disclosed assets sufficient to secure the PJR. Bad news: the assets, like the defendants, are all outside the state. Does the PJR decision, without more, support an order directing defendants to move assets to Connecticut to be attached?

Yes, it does, according to a line of decisions in the District of Connecticut that trace their origin to a detailed analysis of the issue by then District Judge Hon. Jose A. Cabranes.

These cases hold that where a defendant subject to a PJR has no in-state assets, a court may “effectuate [the] prejudgment remedy … by ordering the parties over whom the Court has in personam jurisdiction to bring such assets into Connecticut for purposes of attachment.” Lyons Hollis Associates, Inc. v. New Tech. Partners, Inc., 278 F. Supp. 2d 236, 246 (D. Conn. 2003) (citing Hamma v. Gradco Sys., Inc., 1992 WL 336740, at *2 (D. Conn.) (Cabranes, J.).

In Hamma, Judge Cabranes explained that “[t]he district court's authority to issue such ancillary orders is based on the court's in personam jurisdiction, which gives the court inherent equitable authority to order a party to do certain acts either within or outside the court's territorial jurisdiction.”  Hamma at *3. “The standard for issuance of ancillary orders is no different from the standard for awarding the PJR that such orders help implement. Under Connecticut state law, that standard is neither more nor less than probable cause.” Id. at *3. On this reasoning, a District Court has authority to issue an ancillary order directing a defendant to bring assets to the state to be attached, and “a party seeking this ancillary relief need only establish probable cause.” Lyons, 278 F. Supp. 2d at 247.

In response to a similar application in Garnet Analytics, Inc. v. Diversified Solutions, Inc., 3:12-cv-00716-WWE, Magistrate Judge Holly B. Fitzsimmons again endorsed Judge Cabranes’s analysis, adding that to hold otherwise “would render a prejudgment remedy unavailable in cases with out of state defendants whose assets are located out of state.” See Recommended Ruling on Plaintiff’s Motion for Supplemental Order in Aid of Prejudgment Remedy (slip op. Jul. 16, 2013, 3:12-cv-00716 doc. 183, at 7); affirmed and adopted Aug. 5, 2013 (id. doc. 203)

Defendants may object – and other decisions have held – that an asset transfer order is tantamount to an injunction, and therefore requires the showing necessary for such relief under Fed. R. Civ. P. 65. But in Hamma, Judge Cabranes rejected this objection. “Ancillary orders issued by courts in effectuating prejudgment remedies may have the effect of injunctions, but such orders need not satisfy the requirements governing injunctions in Rule 65 …. On the contrary, federal courts routinely issue ancillary orders in conjunction with prejudgment remedies without finding a ‘likelihood of success on the merits’ or requiring that plaintiff post a bond.” Id. at *3.

This reasoning is consistent with the structure and purpose of the PJR mechanism. Attachment of assets pursuant to a PJR effectively restrains – one could as well say enjoins – their transfer. Without the PJR statute, authority to grant such relief would perhaps have to be found in the general equitable powers of the court. But the substantive law of Connecticut allows for a PJR on probable cause, and does not require a supplemental showing on an injunction standard to proceed with attachment of assets within the state. An order to transfer assets to Connecticut can thus logically be viewed as “ancillary” to the substantive right to prejudgment security.

While there is contrary authority within the District, none deals with the issue in as much detail as the decisions in Hamma, Lyons Hollis Associates and Garnet Analytics, and none can be reconciled with the structure and purpose of the PJR statute.

 A leading contrary decision, Southern New England Tel. Co. v. Global Naps, Inc., 2006 WL 3388393 (“SNET”), reads Hamma as falling short of holding that an asset transfer order can be issued without a finding of irreparable harm. This reading appears to construe a reference to likelihood of success in Hamma as a limitation on its holding. See SNET at *1 n.1.

This construction seems unduly restrictive. Hamma expressly notes the court’s power to order parties over whom it has personal jurisdiction “to take or refrain from taking certain actions.” Hamma at *3. “Take or refrain from taking” corresponds to what might otherwise be termed mandatory or prohibitory injunctive relief. Moreover, Hamma states the issue as whether an asset transfer order “would … require plaintiffs to meet the standard of proof for issuance of an injunction,” and recites the full Second Circuit injunction test – including irreparable harm. See Hamma at *1. The opinion answers this question categorically: such “ancillary orders … need not satisfy the requirements governing injunctions.” Id. at 3. Nothing in the opinion suggests that this question and answer, or the plural “requirements” in the answer itself, somehow exclude the irreparable harm “requirement.” The ultimate conclusion of Hamma would appear to eliminate doubt: the standard for an “ancillary” asset transfer order “is no different from the [probable cause] standard for awarding the PJR.” Id. at 3.

If irreparable harm were required, it could readily be found in the effect the unavailability of assets would have on the distinct interest protected by a PJR. “[P]roceedings for prejudgment remedy applications and civil actions are separate and distinct, … [and] the purpose of filing a civil action is fundamentally different from the purpose of obtaining a prejudgment remedy.” Bernhard-Thomas Bldg. Sys., LLC v. Duncan, 286 Conn. 548, 560-61 (2008). “A prejudgment remedy application is … meant to determine whether security should be provided.” Id. at 561. Lack of in-state assets clearly harms the “separate and distinct” substantive right to prejudgment security. In relation to that right, the harm could easily be seen as “irreparable.”

It is perhaps better to say that the notion of irreparable harm does not logically apply in the PJR context. For example, the black letter rule is that harm compensable by monetary damages is not “irreparable.” But the purpose of a PJR is to secure a judgment for money damages, so to apply this rule would exclude the possibility of any order in aid of a PJR even on an injunction footing. A plaintiff could also claim “irreparable harm” by showing that a defendant is dissipating or transferring assets. But to require such a showing would add a substantive requirement of “insecurity” to the statutory probable cause standard. The lack of such a requirement in the statute implies a legislative policy determination that meeting the statutory probable cause test, without more, gives rise to the “separate and distinct” interest in prejudgment security. If future availability of assets is relevant to this interest at all, it is subsumed within the probable cause requirement. Conditioning ancillary orders on any such additional showing would therefore raise the bar on the statutory right to prejudgment security in a way the statute does not do.

No other decision applying an injunction standard to asset transfer orders analyzes the issue in even as much detail as SNET. Metal Mgmt., Inc. v. Schiavone, 514 F. Supp. 2d. 227, 240-41 (D. Conn. 2007) simply cites SNET without further analysis, and specifically without acknowledging or attempting to reconcile it with Hamma or other contrary authority. Timex Licensing Corp. v. Advance Watch Co. Ltd., 3:07-CV-01731(VLB), 2009 WL 807472 (D. Conn.. Mar. 27, 2009) addresses the issue only by a passing citation to Metal Mgmt.; significantly, the parties did not contest applicability of an irreparable harm element. Id. at *11. Security Ins. Co. of Hartford v. Trustmark Ins. Co., 221 F.R.D. 300, 301 (D. Conn. 2003), relied on a precedent involving a New York statute having no counterpart in the Connecticut PJR scheme.

So don’t be discouraged if your defendants’ assets are all out of state. The Hamma decision and those following it provide a basis to ask the District Court to order them to bring assets to Connecticut. Of course, that only works for assets that can be moved. If the major asset is a Texas ranch, that’s a topic for another article.

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Christopher P. McCormack is an attorney within the environmental law practice area, specializing in litigation, enforcement defense, administrative proceedings and the environmental aspects of corporate and real estate transactions.

Reprinted with permission from the Connecticut Law Tribune. ©2015 ALM Properties, Inc. 
Further duplication without permission is prohibited.  All rights reserved.

 

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