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Prejudgment Attachment of Assets Allowed By DE Bankruptcy Court
It is one thing to hold a claim. It is another to obtain a judgment. And as we all know, obtaining a judgment does not assure actual recovery on the claim. Once a plaintiff obtains a judgment, it can pursue execution proceedings to encumber, seize, and liquidate a defendant's property to satisfy the judgment amount. Often the defendant's conduct raises concerns that assets that would otherwise be available to satisfy the judgement will be transferred or hidden — often beyond the jurisdiction of a court — to frustrate collection of the judgment. That being said, the well-established general rule is a plaintiff cannot attach or seize the defendant's assets prior to obtaining a judgment. So, are there exceptions to the general rule against prejudgment attachment that may allow a plaintiff to obtain injunctive relief against a defendant freezing the defendant's assets prior to the outcome of the litigation? This issue was recently considered by Judge Craig T. Goldblatt of the U.S. Bankruptcy Court for the District of Delaware in Miller v. Mott (In re Team Systems International), Adv. No. 23-5004-CTG (Case No. 22-10066 (CTG)) (Jan. 31, 2023). In that case, after reviewing an unusual factual background replete with issues regarding document "redactions" and other irregularities, the court issued a preliminary injunction freezing the defendants' assets pending the conclusion of the fraudulent transfer litigation.
Pre-Bankruptcy Litigation and Post-Conversion Fraudulent Transfer Litigation Against the Debtor's Principals
According to the opinion, the debtor was a government contractor that provided water bottles to the Federal Emergency Management Agency in support of emergency operations. Pursuant to a contract with the debtor, certain brokers were entitled to a 25% commission on the debtor's net income realized from amounts paid to the debtor by government agencies. A dispute arose between the debtor and the brokers regarding which government payments were covered by the agreement. In litigation before the U.S. District Court for the Northern District of Florida, the brokers obtained judgments against the debtor totaling approximately $6.3 million.
Following entry of the Florida judgments, the brokers sought discovery in aid of execution. The judgment creditors' efforts were stayed when the debtor filed a petition commencing a Chapter 11 bankruptcy case in the U.S. Bankruptcy Court for the District of Delaware. The judgment creditors filed a motion to dismiss the case for bad faith. After a hearing on the motion, the court held cause existed to dismiss the case for bad faith, but the judgment creditors and other participating parties agreed that conversion of the Chapter 11 case to a Chapter 7 liquidation was preferred, and the court converted the case to a Chapter 7 proceeding.
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