Another Tool in the Toolbox of Bankruptcy Trustees and Debtors in Possession

The Pre-Judgment Asset-Freeze Injunction 

Posted by Irve J. Goldman
JANUARY 21, 2016

In a decision handed down on January 4, 2016, a New York Bankruptcy Court issued a preliminary injunction preventing the transfer of any assets of the Defendant in an adversary proceeding in which a turnover of monies, along with an accounting, was sought by a Chapter 11 trustee.  In Ball v. Soundview Composite, Ltd. (In re Soundview Elite Ltd.), 2016 WL 30339 (Bankr. S.D.N.Y. Jan. 4, 2016), Bankruptcy Judge Robert E. Gerber held that such an injunction, commonly known as an asset-freeze injunction, was proper under the traditional standards for issuance of a preliminary injunction under Fed. R. Civ. P. 65, as well as pursuant to a bankruptcy court’s power under Bankruptcy Code §105 to issue any order that is “necessary or appropriate to carry out the provisions of this title.”

The injunction withstood a challenge that it was precluded by the United States Supreme Court’s decision in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 110 S. Ct. 1961 (1999), which held that a federal district court was without authority under Rule 65 to issue a preliminary injunction preventing a defendant from disposing of its assets pending final adjudication of an action seeking money damages.  Id. at 333.  The Bankruptcy Court in Soundview Elite distinguished Grupo Mexicano on the basis that, in the case before it, the trustee also sought equitable relief in the form of an accounting, “which is a classic basis for an asset-freezing order,” Soundview Elite, at *36, and cited numerous decisions in which pre-judgment asset-freeze orders were allowed where the underlying claims included equitable claims, such as a claim for a constructive trust, in addition to claims for money damages.  Id. at *36 n. 223, 224.  See also generally Goldman, Can You Freeze Assets in a Fraudulent Conveyance Action After Grupo Mexicano, 24 Am. Bankr. Inst. J. 54 (May 2005).

Another important aspect of the Soundview Elite decision was the Court’s issuance of a preliminary injunction even though it held it could not enter a final judgment on the turnover claim under Bankruptcy Code §542(a) because “the uncertainties as to the amount to be turned over make use of the turnover power inappropriate.”  Id. at *15.  This is because when the amount due on a debt is not completely certain, courts have held that the action is not properly brought as a claim for turnover under Bankruptcy Code §542, meaning that a bankruptcy court can only issue proposed findings of fact and conclusions of law, subject to de novo review by the district court, on such a claim.  Yet, the Bankruptcy Court found that it could nonetheless enjoin the Defendant from dissipating its assets until that process was completed.

The ability of bankruptcy trustees and debtors in possession to pursue a preliminary injunction freezing a Defendant’s assets pending a disposition on the merits of the action provides a significant litigation and negotiating advantage in the quest to augment the assets of a bankruptcy estate.

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