The 2020 coronavirus pandemic has not spared the asset recovery practice from its profound impacts. As we previously have discussed,[1] the pandemic accelerated trends toward increased globalization and the ability of evasive debtors to move assets fluidly around the world, as business operators, banks, regulators and virtually all market segments rapidly embraced remote work and electronic commerce. This environment requires nimble debt enforcement strategies to leverage the de rigueur virtual engagement of 2020 and keep pace with assets in transit, and demands the most effective enforcement tools available. 

Choosing the right court, based on the right intelligence, is critical to success, and often the difference between complete recovery and years of frustration. In recent years, sophisticated creditors have increasingly recognized the significant investigative value of invoking the long-arm jurisdiction of a U.S. district court. The U.S. trial courts have defined their discovery reach very broadly.[2]  Coupled with the broad party-driven discovery scope codified in Rule 26(b) of the Federal Rules of Civil Procedure, the courts’ extensive long-arm jurisdiction arms creditors in federal court litigation with the tools to conduct global depositions, subpoena non-party testimony and documents, and often secure evidence from far corners of the world.[3] Based on extensive experience utilizing these procedures, we have long advised clients that there is no better ally in the investigation phase of asset recovery efforts than a U.S. federal court.

Unfortunately, many creditors will forego these considerable investigative advantages based on the faulty but commonly accepted conclusion that freeze orders to preserve assets pending litigation (commonly referred to as Mareva injunctions) are not available in the United States. While obtaining a preserving freeze order in the United States is a nuanced practice that requires proper pleading and, often, understanding and invoking an interplay of federal authorities and state law, freeze orders are indeed available. Their availability presents creditors with a best-of-both-worlds scenario, marrying the ability to secure a widely enforceable freeze order with U.S. long-arm jurisdiction to secure needed broad discovery.  

            The Supreme Court’s Rejection of Mareva Injunctions in Certain Cases

At the outset, virtually all common law jurisdictions, including English, Australian and American courts, recognized a general presumption that a plaintiff alleging only a general claim of money damages is not entitled to a pre-judgment order restraining the defendant from disposing assets. See, e.g., Lister & Co. v. Stubbs, 45 Ch. 1, 13 (C.A.) [1890] (holding that the Court of Appeal could not issue an injunction restraining the defendant’s use of assets prior to judgment). In 1975, however, the English Court of Appeal recognized an exception in Mareva Compania Naviera SA v International Bulkcarriers SA 2 Lloyd's Rep 509 [1975]. Mareva allowed for a pre-judgment injunction where “it appears the debt is due and owing, and there is a danger that the debtor may dispose of his assets so as to defeat it before judgment.” Since 1998, Mareva injunctions have been codified into English civil procedure rules, and most common law nations recognize an analogous process. 

In 1999, the United States Supreme Court, in Grupo Mexicano de Desarrollo S.A. v. All. Bond Fund, Inc.,[4] reviewed the applicability of Mareva and held that U.S. federal courts lack the inherent power to issue such injunctions in money-damages cases under Rule 65. The Court found that the creation of such a power was best addressed by Congress, not the courts. Since Grupo Mexicano, conventional wisdom has been that freeze orders to preserve assets pending judgment are unavailable in the United States. However, federal courts since 1999 have repeatedly confirmed that this conventional wisdom overstates the ruling in Grupo Mexicano and that, in fact, freeze orders are available with the proper pleadings and evidence. In doing so, those courts have generally adopted standards for issuance that are similar to those found in other common law jurisdictions.

            Three Cases When Freeze Orders Are Available

The Supreme Court held in Grupo Mexicano that courts do not have authority under Rule 65 to issue Mareva injunctions “pending adjudication of [a] contract claim for money damages.”   527 U.S. at 333.  Subsequent courts have faithfully applied this ruling while recognizing at least three important distinctions where freeze orders are available. Grupo Mexicano says nothing about cases where Rule 65 does not apply, cases involving equitable claims, or “mixed cases” where the plaintiff seeks both legal and equitable relief. With careful pleading, a creditor can avoid the crosshairs of Grupo Mexicano and obtain a preserving freeze order in federal district court.

1. Injunctive Relief Under Rule 64

The first distinction from Grupo Mexicano concerns the issuing court’s authority under various statutes other than Rule 65. Although Grupo Mexicano prohibits a court from issuing Mareva injunctions under Rule 65 in claims seeking purely legal relief, it does not prohibit a court from issuing these injunctions where it has authority from other rules or statutes. Grupo Mexicano, 527 U.S. at 330–31.  

Most significantly, this includes Rule 64, which allows federal courts to issue preliminary injunctions to the extent permitted by the law of the state where the court is located. For example, many states, including New York[5], California[6], and Texas[7], allow plaintiffs to seek pre-trial injunctive relief under that state’s attachment statute. See United States ex rel. Rahman v. Oncology Assocs., 198 F.3d 489, 501 (4th Cir. 1999) (“[W]e conclude that the scope of Federal Rule of Civil Procedure 64 incorporates state procedures authorizing any meaningful interference with property to secure satisfaction of a judgment, including any state-authorized injunctive relief for freezing assets to aid in satisfying the ultimate judgment in a case.”); see also CBF Industria de Gusa v. AMCI Holdings, Inc., No. 13-2581-PKC, Order Confirming Ex Parte Order of Prejudgment Attachment and Granting Injunctive Relief, ECF No. 286 (S.D.N.Y. July 16, 2019) (granting plaintiff’s New York state attachment order under Rule 64).  

Likewise, Grupo Mexicano does not foreclose courts from issuing Mareva injunctions when another federal statute governs. 527 U.S. at 330–31. So, for example, courts have issued Mareva-style injunctions under the Bankruptcy Code because it affords the courts greater equitable powers. See In re Dow Corning Corp., 280 F.3d 648, 657–58 (6th Cir. 2002) (finding that due to the statutory grant of power found in Section 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.”).  

2. Cases in Equity

When a plaintiff seeks equitable relief, courts also recognize a distinction from the prohibition of Grupo Mexicano. Grupo Mexicano made clear that its ruling was confined to cases where the plaintiff seeks purely legal relief­, like contract claims for money damages. On the other hand, a court may grant a preliminary asset-freeze injunction based on claims for equitable relief. Deckert v. Indep. Shares Corp., 311 U.S. 282, 288–89 (1940) (finding injunctive relief appropriate because plaintiff sought rescission and restitution); New Falls Corp. v. Soni Holdings, LLC, No. CV19449ADSAKT, 2019 WL 4015170, at *10 (E.D.N.Y. July 5, 2019) (“Grupo Mexicano does not . . . preclude courts from entering asset-freezing preliminary injunctions in cases in which the movant seeks equitable relief . . . and the preliminary injunction is ancillary to the final relief.”)

3. Cases of Mixed Law and Equity

Finally, courts interpreting Grupo Mexicano have confirmed that the mere presence of claims of money damages does not preclude a freeze order, opening the way to such orders in cases of mixed claims seeking both equitable and legal relief. Plaintiffs bringing mixed claims, however, must demonstrate that they are genuinely seeking equitable relief in good faith, not just as a means to defeat Grupo Mexicano, and must show “a ‘nexus’ between the injunctive relief requested and the equitable relief ultimately sought.” New Falls Corp, 2019 WL 4015170, at *10 (citation omitted) (requiring a showing that the injunction “is reasonably necessary to preserve the status quo with respect to particular assets so that the court can grant the movant ultimate relief”); Matrix Partners VIII, LLP v. Nat. Res. Recovery, Inc., No. 1:08-CV-547, 2009 WL 175132, at *5 (E.D. Tex. Jan. 23, 2009) (finding that for mixed cases, “a nexus between the assets sought to be frozen through an interim order and the ultimate relief requested in the lawsuit ‘is essential to the authority of a district court in equity to enter a preliminary injunction freezing assets’” (emphasis in original)) (“[I]t may be incumbent on the court to determine on a case by case basis whether an action, considered in context, is truly equitable in nature or whether it is fundamentally an action at law with ancillary claims that merely sprinkle a bit of equity on a suit for money damages.”).  

            Conclusion

As is the case in other common law jurisdictions, a freeze order is considered an extraordinary remedy. Courts thus hold creditors to a high burden. In any jurisdiction, securing such an order will require a well-prepared claimant who can demonstrate a high likelihood of success on the merits and the propriety of the relief sought. In the United States, establishing that propriety involves establishing a strong basis under law other than the inherent injunctive powers of the court or a real nexus to genuine equitable relief. These requirements are far from a prohibition on freeze orders and, in cases where these burdens can be met, creditors invoking the jurisdiction of a U.S. district court stand to benefit from a far-reaching freeze order and the extensive discovery uniquely available in the United States.

[1] See previously written article here and here

[2] See In re Ishihara Chem. Co., 121 F. Supp. 2d 209, 225 (E.D.N.Y. 2000) (“[T]he U.S. system of broad discovery is fundamentally different from that of most foreign countries . . . most other countries fiercely limit the scope of discovery to protect personal privacy and consider U.S. discovery to be a fishing expedition.”) (Citation and quotation omitted); see also Lewis v. ACB Bus. Servs., 135 F.3d 389, 402 (6th Cir. 1998) (“The scope of discovery under the Federal Rules of Civil Procedure is traditionally quite broad.”)

[3] See Zassenhaus v. Evening Star Newspaper Co., 404 F.2d 1361, 1364 n.1 (D.C. Cir. 1968) (discussing several permissible methods for taking depositions in foreign countries under Rule 28(b)); see also First Am. Corp. v. Price Waterhouse LLP, 154 F.3d 16, 21 (2nd Cir. 1998) (quoting Fed. R. Civ. P. 45, Advisory Comm. Notes (“Paragraph (a)(2) makes clear that the person subject to the subpoena is required to produce materials in that person’s control whether or not the materials are located within the district or within the territory within which the subpoena can be served. The non-party witness is subject to the same scope of discovery under this rule as that person would be as a party to whom a request is addressed pursuant to Rule 34.”)) 

[4] 527 U.S. 308 (1999)

[5] N.Y. C.P.L.R. § 6201 et seq.

[6] Cal. Code. Civ. Proc. § 481.010 et seq.

[7] Tex. Civ. Prac. & Rem. Code Ann. § 61.001 et seq.