Originally from:
The Practice of International Litigation - 2nd Edition - Looseleaf
The Practice of International Litigation - 2nd Edition - Electronic
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Injunctions Against Transfer of Assets
Lawrence W. Newman and Michael Burrows
The Supreme Court of the United States recently handed down a
decision that should be of particular concern to those involved in
international litigation. In Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond
Fund, Inc., 119 S.Ct. 1961 (1999), a 5-4 majority held that federal courts do
not have jurisdiction to enjoin the transfer of assets by a debtor pending the
litigation of a claim for money damages. This decision is noteworthy
because it represents a rejection of English jurisprudence on the subject,
and because it appears to foreclose a significant avenue of provisional relief,
one that would have particular value in international disputes. The majority
opinion, presenting a reasoned argument said to be grounded in historical
fact, denies to plaintiffs the sort of relief that is crucial in many international
cases and that is, in fact, available in England. It therefore serves to
highlight the need for a uniform, national regime in the United States that
affords equitable prejudgment remedies in all-too-common cases in which
sophisticated debtors use modern technology to elude their creditors.
The Grupo Mexicano de Desarrollo Decision
The Grupo Mexicano de Desarrollo case arose out of the purchase by Allied
Bond Fund, Inc. and other investment funds of approximately $75 million
in 8.25% unsecured, guaranteed notes from Grupo Mexicano de
Desarrollo, S.A. (“GMD”). The notes, due in 2001, represented some of
the $250 million in notes issued by GMD in 1994, all of which had equal
priority in payment with all of GMD’s other secured and unsecured debt.
By mid-1997, GMD was experiencing serious financial problems. At
that time, its debt apart from the notes was approximately $450 million. In
the latter half of 1997 it was made public that GMD planned to deal with its
$256 million bank debt before its debt to private investors, and that, of
approximately $309 million in notes expected to be issued to GMD by the
Mexican government in connection with toll road projects, GMD would be
placing its right to receive $17 million worth of notes in trust and
transferring its right to another $100 million worth of notes to the Mexican
government.
GMD missed its August 1997 interest payment on the notes. The
investors accelerated the principal amount of their notes on December 11,
1997, and filed suit for the amount due on December 12, 1997, in the
United States District Court for the Southern District of New York. In
addition to requesting damages of $80.9 million for breach of contract, they
requested a preliminary injunction restraining GMD from transferring the
notes connected to the toll road projects or receivables from those projects.
The requested injunction was of crucial importance to the investors,
because they would only be able to recover on the anticipated judgment if
GMD still had assets.
The district court entered a temporary restraining order preventing
GMD from transferring its right to those notes. On December 23, 1997, it
entered a preliminary injunction, and ordered the investors to post a
$50,000 bond.
GMD appealed the preliminary injunction to the Second Circuit. While
that appeal was pending, the district court granted summary judgment to
the investors on the contract claim and converted the injunction into a
permanent injunction. GMD appealed that decision and the permanent
injunction; it later abandoned the appeal from the permanent injunction.
The Second Circuit affirmed the preliminary injunction; GMD’s appeal of
the summary judgment is still pending. The Supreme Court granted
certiorari in 1998.
The Supreme Court, in the majority opinion written by Justice Scalia,
reversed and remanded. As a preliminary matter, the Court held --
unanimously -- that the validity of the preliminary injunction was not moot:
as Justice Scalia noted, “[i]f petitioners are correct, they have been harmed
by issuance of the preliminary injunction -- and hence should be able to
recover on the bond -- even if the final injunction is proper.”
