Asset Freeze Litigation 7-11-06

ASSET FREEZE ORDER LITIGATION IN FEDERAL COURT
Leonard L. Gumport* Gumport | Reitman 550 South Hope St., Ste. 825 Los Angeles, California 90071 panelists acknowledged outline.] [*The assistance of other in preparing this outline is on page 1 of the attached
ABA Criminal Justice, White Collar Crime Committee; West Coast Region January 17, 2001 Seminar
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TABLE OF CONTENTS Page

Field result goes here...............................................................................................INTRODUCTION ..................................................................................................................................................1 Field result goes here...................POWER OF FEDERAL COURTS TO GRANT PROVISIONAL INJUNCTIONS THAT FREEZE ASSETS.............................................................................3 Field result goes here.........Inherent Power of Federal Courts to Grant Asset Freeze Orders ......................................................................................................................................3 Field result goes here........Statutory Power of Federal Courts to Grant Asset Freeze Orders ......................................................................................................................................5 Field result goes here...................................Federal Debt Collection Procedures Act ..........................................................................................................................5 Field result goes here...........................................................................................RICO ..........................................................................................................................6 Field result goes here.........................................................................18 U.S.C. 1345 ..........................................................................................................................7 Field result goes here.................................18 U.S.C. 983(j) and 21 U.S.C. 853(e) ..........................................................................................................................8 Field result goes here.............Fed.R.Civ.P. 64 and State Law Provisional Remedies, Including The Uniform Fraudulent Transfer Act..........................................8 Field result goes hereGrupos Limitations on Power of Federal Courts to Freeze Assets to Secure Payment of a Money Judgment..................................................................9 Field result goes here..................................................................Pre-Grupo Case Law ........................................................................................................................10 Field result goes here..........................................................................The Grupo Case ........................................................................................................................11 Field result goes here.........................................................Post-Grupo Developments ........................................................................................................................15 Field result goes here Standards Applied under Fed.R.Civ.P. 65 in Determining Whether to Issue an Asset Freeze Order......................................................................................17 Field result goes here.............................................................................General Rules ........................................................................................................................17 Field result goes here...........Special Rule in Government Enforcement Proceedings ........................................................................................................................19 Field result goes here..........Examples of Cases Weighing Whether to Freeze Assets ........................................................................................................................21 Field result goes here..............................................FTC v. Affordable Media ...........................................................................................................21 Field result goes here.................................................FTC v. H.N. Singer, Inc. ...........................................................................................................21 Field result goes here...................................................FTC v. Evans Products ...........................................................................................................22 Field result goes here...................................................SEC v. Manor Nursing ...........................................................................................................23 Field result goes here...............Examples of Cases Addressing Living Expenses and Attorney Fee Issues in Asset Freeze Litigation............................................24 Field result goes here.............................................................Living Expenses i. Asset freeze llg 1.wpd
...........................................................................................................24 Field result goes here.................................................................Attorney Fees ...........................................................................................................24 i. In General.............................................................................24 ii. Retainers...............................................................................26 iii. Forfeitures and Restraining Orders That Preclude Attorney Fees.......................................................................................27 Field result goes here.......Notice Requirements for Obtaining Order under Fed.R.Civ.P. 65 ....................................................................................................................................29 Field result goes here.......................Notice Requirement for Preliminary Injunction ........................................................................................................................29 Field result goes here.....................................................Notice Requirement for TRO ........................................................................................................................29 Field result goes here.........................Evidentiary Issues in Litigation under Fed.R.Civ.P. 65 ....................................................................................................................................31 Field result goes here....................................................Use of Inadmissible Evidence ........................................................................................................................31 Field result goes here.......Use of Evidence at Trial and Consolidation with Trial on Merits.............................................................................................................32 Field result goes here..................Live Testimony at Preliminary Injunction Hearing ........................................................................................................................32 Field result goes here..........Persons Bound by and Territorial Reach of Asset Freeze Order under Fed.R.Civ.P. 65................................................................................................32 Field result goes here............................................................Persons Bound by Order ........................................................................................................................32 Field result goes here.........................................................Territorial Reach of Order ........................................................................................................................33 Field result goes here...............................................Bond Requirement of Fed.R.Civ.P. 65(c) ....................................................................................................................................34 Field result goes here....................Appeal of Preliminary Injunctions under Fed.R.Civ.P. 65 ....................................................................................................................................35 Field result goes here...................Contempt Sanctions for Violating Preliminary Injunction ....................................................................................................................................36 Field result goes here................................................Civil versus Criminal Contempt ........................................................................................................................36 Field result goes here...........................................................The Inability to Comply ........................................................................................................................37 Field result goes here.....PARALLEL PROCEEDING ISSUES IN ASSET FREEZE LITIGATION ................................................................................................................................................38 Field result goes here....Stay of Civil Proceeding Pending Resolution of Criminal and Fifth Amendment Issues.....................................................................................................38 Field result goes here...Criminal Liability That May Result from Misconduct during Asset Freeze Litigation........................................................................................................43 Field result goes here.....................................................................Criminal Contempt ........................................................................................................................43 Field result goes here...........................................Fraudulently Transferring Property ........................................................................................................................43 Field result goes here.....................................................Transporting Stolen Property ii. 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........................................................................................................................43 Field result goes here.........................................................................................Perjury ........................................................................................................................43 Field result goes here........Fraudulently Concealing Property from an Officer of the Court..............................................................................................................43 Field result goes here......Fraudulently Withholding Property from an Officer of the Court after Filing of Bankruptcy Case.........................................................44 Field result goes here....Fraudulently Transferring Property in Contemplation of or During Bankruptcy Case...............................................................................44 Field result goes here.......Impact on Sentencing of Conduct during Asset Freeze Litigation ....................................................................................................................................44 Field result goes here....................................................Acceptance of Responsibility ........................................................................................................................44 Field result goes here........................................Substantial Assistance to Authorities ........................................................................................................................45 Field result goes here......................................................................Parallel Civil Proceedings ....................................................................................................................................45 Field result goes here..........BANKRUPTCY ISSUES IN ASSET FREEZE ORDER LITIGATION ................................................................................................................................................46 Field result goes here..........................Power of District Court to Prevent Bankruptcy Filing ....................................................................................................................................46 Field result goes here...................................Power of Federal Court to Withdraw Reference ....................................................................................................................................48 Field result goes here..................................................The Automatic Stay 11 U.S.C. 362 ....................................................................................................................................48 Field result goes here....................................Scope of Automatic Stay 362(a)-(b) ........................................................................................................................48 Field result goes here.......................................................................In General ...........................................................................................................48 Field result goes here...................................................Contempt Proceedings ...........................................................................................................50 Field result goes here...........................Modification of Automatic Stay 362(d) ........................................................................................................................52 Field result goes here...The Price of the Automatic Stay Bankruptcy Restrictions ........................................................................................................................53 Field result goes here..................................................Denial of Discharge 11 U.S.C. 727 ....................................................................................................................................54 Field result goes here..................................................................11 U.S.C. 727(a)(2) ........................................................................................................................55 Field result goes here..................................................................11 U.S.C. 727(a)(3) ........................................................................................................................55 Field result goes here..................................................................11 U.S.C. 727(a)(5) ........................................................................................................................55 Field result goes here..................................................................APPOINTMENT OF A RECEIVER .................................................................................................................................................55 Field result goes here....Inherent Power of Federal Court to Appoint Receiver as Ancillary Equitable Remedy......................................................................................................55 Field result goes here........................Statutory Power of Federal Court to Appoint Receiver iii. 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....................................................................................................................................57 Field result goes here...................................Federal Debt Collection Procedures Act ........................................................................................................................57 Field result goes here.........................................................................18 U.S.C. 1345 ........................................................................................................................58 Field result goes here.......................................................................18 U.S.C. 983(j) ........................................................................................................................58 Field result goes here......Fed.R.Civ.P. 64 and the Uniform Fraudulent Transfer Act ........................................................................................................................58 Field result goes here.............Broad Discretion of Federal Court to Supervise Receivership ....................................................................................................................................59 Field result goes here.................................................................Receivership and Bankruptcy ....................................................................................................................................59 Field result goes here......................................................Power of Receiver to File Litigation ....................................................................................................................................61 Field result goes here.................................Control by Receiver of Attorney-Client Privilege ....................................................................................................................................63 Field result goes here............................................Protection of the Receiver from Litigation ....................................................................................................................................63 Field result goes here.........................................Duty of Receiver to Comply with State Law ....................................................................................................................................65 Field result goes here..................................................................Duty of Receiver to Account ....................................................................................................................................65 Field result goes here..............................Claimants and Distribution of Receivership Assets ....................................................................................................................................65 Field result goes here.........................................................Assessment of Receivership Costs ....................................................................................................................................66 Field result goes here..............................................................Appeal of Receivership Orders ....................................................................................................................................67 Field result goes here.........................................................................ASSET FORFEITURE ISSUES ................................................................................................................................................67 Field result goes here.........................................................Civil Asset Forfeiture Reform Act ....................................................................................................................................67 Field result goes hereCAFRA Imposes Various Procedures and Deadlines for Government and Claimants............................................................................................................68 Field result goes here..................................................CAFRA Switches the Burden of Proof ....................................................................................................................................68 Field result goes here.................................................CAFRA Codifies the Innocent Owner ....................................................................................................................................69 Field result goes here..........................CAFRA Codifies Supreme Court Constitutional Law ....................................................................................................................................69 Field result goes here.........................................CAFRA Changes the Statute of Limitations ....................................................................................................................................69 Field result goes here....................................................CAFRA Extends Reach of Forfeiture ....................................................................................................................................69 Field result goes here................................CAFRA Expands Forfeiture of Fungible Property ....................................................................................................................................70 Field result goes here...................CAFRA Codifies Procedures for Forfeiting Real Property iv. 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....................................................................................................................................70 Field result goes here..........................................CAFRA Allows Recovery of Attorney Fees ....................................................................................................................................70 Field result goes here. CAFRA Punishes as a Crime any Destruction, Transfer, or Disposal of Property.................................................................................................................70 Field result goes here.............................................................CAFRA Provides for Sanctions ....................................................................................................................................71 Field result goes here..........................CAFRA Reinstates Fugitive Disentitlement Doctrine ....................................................................................................................................71 Field result goes here..................................CAFRA Maintains Pre-Trial Restraining Orders ....................................................................................................................................71
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ASSET FREEZE ORDER LITIGATION IN FEDERAL COURT

by Leonard L. Gumport1 INTRODUCTION This outline discusses asset freeze order litigation in civil and criminal proceedings in federal court. For purposes of this outline, asset freeze order means a prejudgment order restraining a party from transferring or disposing of a substantial portion of its assets. E.g., in Republic of Philippines v. Marcos, 862 F.2d 1355, 1358 (9th Cir. 1988), cert. denied, 490 U.S. 1035, 109 S.Ct. 1933, 104 L.Ed.2d 404 (1989) (Marcos), the Ninth Circuit affirmed a preliminary injunction that enjoined the defendants from disposing of any of their assets save for the payment of attorney fees and normal living expenses pending a trial on the merits of plaintiffs constructive trust claim. E.g., in FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1111 (9th Cir. 1982), the Ninth Circuit affirmed a preliminary
1 This outline incorporates materials, suggestions, and/or
comments provided by: (a) Mark E. Beck and Anthony A. De Corso of Beck, De Corso, Daly & Kreindler, (b) Valerie Caproni, Regional Director of the Securities and Exchange Commission, (c) the Hon. Audrey B. Collins, U.S. District Judge, (d) Frederick D. Friedman of ONeill, Lysaght & Sun LLP, (e) Richard M. Pachulski of Pachulski, Stang, Ziehl, Young & Jones, and (f) Consuelo S. Woodhead, Chief Assistant United States Attorney for the Central District of California. Messrs. Beck and De Corso and Ms. Woodhead were especially helpful in preparing materials relating to the Civil Asset Forfeiture Reform Act, and Part VI of this outline is primarily the result of their invaluable assistance. I thank all the panelists for their help. All views expressed and any errors contained in this outline are exclusively mine and should not be construed as reflecting the views of the other panelists or any of our respective clients, agencies, or employers.
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injunction that restrained the defendants from directly or indirectly, transferring, liquidating, encumbering, pledging, assigning, or otherwise disposing of any property of Singer, or of any of their personal assets or property (except for ordinary living expenses) unless allowed by further order of this Court. E.g., in FTC v. J.K. Publications, Inc., 99 F.Supp.2d 1176, 1179 (C.D. Cal. 2000) (J.K. Publications), the district court granted the FTC a temporary restraining order that froze the defendants assets and required, inter alia, that the defendants be temporarily enjoined from conducting certain business practices and [that] the defendants disclose all assets held by them, for their benefit or under their direct or indirect control; in that decision, which contains an extensive factual and legal analysis, the district court also appointed a receiver. See Walczak v. EPL Prolong, Inc., 198 F.3d 725, 730 (9th Cir. 1999) (preliminary injunction preventing consummation of stock swap was not a freeze order because this injunction does not completely prohibit Appellants from taking any action with regard to their assets). This outline discusses various types of asset freeze orders, including preliminary injunctions and receivership orders. This outline also discusses the Fifth Amendment, asset forfeiture, sentencing, and bankruptcy issues that may arise when an asset freeze order is granted against a defendant. In addition, this outline discusses the Supreme Courts recent decision in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund,
Inc., 527 U.S. 308, 119 S.Ct. 1961, 144 L.Ed.2d 319 (1999) (Grupo), in which the Supreme Court declined to follow Mareva Compania Naviera S.A. v. International Bulkcarriers S.A., 2 Lloyds Rep. 509 (1975) (Mareva). POWER OF FEDERAL COURTS TO GRANT PROVISIONAL INJUNCTIONS THAT FREEZE ASSETS Inherent Power of Federal Courts to Grant Asset Freeze Orders An asset freeze order may take the form of a preliminary injunction or temporary restraining order in a federal civil action. See, e.g., Marcos, 862 F.2d at 1355-58; FTC v. H.N. Singer, Inc., supra, 668 F.2d at 1107-11; J.K. Publications, Inc., 99 F.Supp.2d at 1176-79. /// Fed.R.Civ.P. 65 generally governs the procedure for obtaining provisional injunctive relief in any civil action in federal court. See Fed.R.Civ.P. 1 (Federal Rules of Civil Procedure apply to all civil actions with the exceptions stated in Rule 81"). See, e.g., 18 U.S.C. 1345(b) (action by Attorney General to enjoin disposition of property traceable to banking law violations and other offenses is governed by the Federal Rules of Civil Procedure . . . .); United States v. Crozier, 777 F.2d 1376, 1384 (9th Cir. 1985) (Rule 65 applied to procedure for obtaining postindictment, pre-trial restraining order under 21 U.S.C. 853); United States v. Roth, 912 F.2d 1131, 1132-33 (9th Cir. 1990) (explaining Croziers application of Rule 65 as follows: In the absence of valid procedural guidelines in the forfeiture provisions of [the Comprehensive Forfeiture Act of 1984, 21 U.S.C. 853], we held that Rule 65 of the Federal Rules of Civil Procedure applies to require a district court to hold a prompt hearing after a TRO is granted to determine whether a preliminary injunction should issue); United States v. Real Property
Located at Incline Village, 958 F.Supp. 482, 486 (D. Nev. 1997) (Generally, procedure in civil in rem forfeiture actions is governed by the Federal Rules of Civil to the extent consistent with the Supplemental Rule for Certain Admiralty and Maritime Claims, and otherwise by the Supplemental Rules themselves). However, Rule 65 is not a source of power for a district court to enter an injunction. Rather, it regulates the issuance of injunctions otherwise authorized. United States v. Cohen, 152 F.3d 321, 325 (4th Cir. 1998) (emphasis added); see Reebok International, Ltd. v. Marnatech Enterprises, Inc., 970 F.2d 552, 558 (9th Cir. 1992) (Reebok International) (Rule 65 of the Federal Rules of Civil Procedure governs the procedure for the issuance of a preliminary injunction: the authority for the injunction issued in Reebok II must arise (if at all) elsewhere). A federal court has inherent power and does not need statutory authority to grant an asset freeze order for the purpose of preserving the federal courts ability to grant effective final equitable relief. Reebok International, 970 F.2d at 559 (We need not determine, however, whether [Fed.R.Civ.P.] Rule 64 or the Lanham Act itself authorizes the prejudgment asset freeze entered in Reebok II because, regardless of the scope of those provisions, the injunction is authorized by the district courts inherent equitable power to issue provisional remedies ancillary to its authority to provide final equitable relief). See De Beers Consolidated Mines, Ltd. v. United States, 325 U.S. 212, 220, 65 S.Ct. 1130, 89 L.Ed. 1566 (1945) (stating in dicta that A preliminary injunction is always appropriate to grant intermediate relief of the same character as that which may be granted finally). Reebok International and Marcos illustrate this principle: In Reebok International, the Ninth Circuit concluded that the district court had authority to grant an
asset freeze order to protect the plaintiffs right to the final equitable relief of an accounting. Id., 970 F.2d at 559 (Because the Lanham Act authorizes the district court to grant Reebok an accounting of Betechs profits as a form of final equitable relief, the district court had the inherent power to freeze Betechs assets in order to ensure the availability of that final relief). In Marcos, 862 F.2d 1355, the gravamen of the plaintiffs complaint was to recover money damages for conversion of public property. However, the complaint included a cause of action to impose a constructive trust. The Ninth Circuit held that this cause of action was equitable and that the district court did not abuse its discretion in concluding that an asset freeze order was necessary to preserve the possibility of that equitable relief. Id., at 1364 (federal court has power the power to issue a preliminary injunction to prevent a defendant from dissipating assets in order to preserve the possibility of equitable remedies). Statutory Power of Federal Courts to Grant Asset Freeze Orders The inherent equitable power of federal courts is not their exclusive source of authority to issue asset freeze orders. Certain statutes expressly authorize federal courts to grant asset freeze orders. The following are several examples. Federal Debt Collection Procedures Act The Federal Debt Collection Procedures Act, 28 U.S.C. 3001 et seq., expressly authorizes the United States to obtain provisional remedies in debt collection actions. 28 U.S.C. 3101. Those remedies include attachment, a receiver, garnishment, and sequestration of the
debtors assets. Id., 3102-05. Section 3101(b) of title 28 provides that the grounds for obtaining such provisional relief include the following: (b) Grounds. Subject to section 3101, 3103, 3104, or 3105, a prejudgment remedy may be granted by any court if the United States shows reasonable cause to believe that (1) the debtor (A) is about to leave the jurisdiction of the United States with the effect of hindering, delaying or defrauding the United States in its effort to recover a debt; (B) has or is about to assign, dispose, remove, conceal, ill treat, waste, or destroy property with the effect of hindering, delaying, or defrauding the United States; . . . . RICO The Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. 1961 et seq., expressly authorizes the Attorney General to seek pre-trial restraining orders in civil actions. 28 U.S.C. 1964(a) provides that district courts shall have jurisdiction to prevent and restrain violations of section 1962 of this chapter by issuing appropriate orders . . . . Section 1964(b) provides: The Attorney General may institute proceedings under this section. Pending final determination thereof, the court may at any time enter such restraining orders or prohibitions, or take such other actions, including the acceptance of satisfactory performance bonds, as it shall deem proper. In addition, RICO authorizes the United States to obtain pre-trial restraining orders in criminal cases to preserve property for forfeiture. 18 U.S.C. 1963(d).
18 U.S.C. 1345 18 U.S.C. 1345 is sometimes referred to as the fraud injunction statute and came into existence as part of the Comprehensive Crime Control Act of 1984, Pub.L. No. 98-473. See United States v. Brown, 988 F.2d 658, 662 (6th Cir. 1993) (The legislative history of the original version of 18 U.S.C. 1345 indicates that Congress perceived great need to expand the Attorney Generals ability to seek injunctive relief in fraudulent scheme cases). 18 U.S.C. 1345(a)(1) expressly authorizes the Attorney General to file a civil action to enjoin violations of various criminal statutes, including but not limited to false claims (18 U.S.C. 287), conspiracy to defraud the United States or its agencies (18 U.S.C. 371), mail fraud (18 U.S.C. 1341), bank fraud (18 U.S.C. 1344), and health care fraud (18 U.S.C. 1347). In addition, 1345 authorizes the Attorney General to seek provisional relief to prevent the disposition of property traceable to certain offenses. Section 1345(a)(2) of title 18 provides: (2) If a person is alienating or disposing of property, or intends to dispose of property, obtained as a result of a banking law violation (as defined in [18 U.S.C.] section 3322(d) of this title or a Federal health care offense) or property which is traceable to such violation, the Attorney General may commence a civil action in any Federal court (A) to enjoin such alienation or disposition of property; or (B) for a restraining order to (i) prohibit any person from withdrawing, transferring, removing, dissipating, or disposing of any such property or property of equivalent value; and (ii) appoint a temporary receiver to administer such restraining order.
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Although 1345(a)(2) only refers to provisional relief in connection with banking law violations, 1345(b) authorizes pre-trial restraining orders and does not limit itself to banking law violations. In United States v. Brown, supra, 988 F.2d at 662, the Sixth Circuit concluded that 1345's asset-freeze remedy is not limited to banking-law violations. Section 1345(b) provides in part that the district court shall proceed as soon as practicable to the hearing, and that, at any time before final determination, enter such restraining order or prohibition as is warranted to prevent a continuing and substantial injury to the United States or to any person or class of persons for whose protection the action is brought. 18 U.S.C. 983(j) and 21 U.S.C. 853(e) 18 U.S.C. 983(j), enacted as part of the Civil Asset Forfeiture Reform Act, expressly authorizes restraining orders in forfeiture proceedings. See VI, below. Other forfeiture statutes also authorize pre-trial restraining orders. See, e.g., 21 U.S.C. 853(e). Fed.R.Civ.P. 64 and State Law Provisional Remedies, Including The Uniform Fraudulent Transfer Act Federal courts have authority under Fed.R.Civ.P. 64 to grant provisional remedies authorized by state law for seizure of person or property for the purpose of securing satisfaction of the judgment ultimately to be entered in the action. See, e.g., United States v. Oncology Associates, P.C., 198 F.3d 489, 501 (4th Cir. 1999) (in granting an asset freeze order a writ of attachment and a conditional preliminary injunction pursuant to Maryland law and Fed.R.Civ.P. 64, circuit court stated: Accordingly, we 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 the case). One state law that may be utilized pursuant to Fed.R.Civ.P. 64 in civil asset freeze litigation is Cal. Civ. Code 3439.07, which is a part of Californias Uniform Fraudulent Transfer Act (the UFTA), Cal. Civ. Code 3439 et seq. The UFTAs definition of fraudulent transfer includes a transfer made by a debtor with actual intent to hinder, delay, or defraud any creditor of the debtor. Cal. Civ. Code 3439.04(a). Section 3439.07 of the Civil Code, provides: (a) In an action for relief against a transfer or obligation under this chapter, a creditor, subject to the limitations in Section 3439.08, may obtain: (1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditors claim. (2) An attachment or other provisional remedy against the asset transferred or its proceeds in accordance with the procedures described in Title 6.5 (commencing with Section 481.010) of Part 2 of the Code of Civil Procedure. (3) Subject to applicable principles of equity and in accordance with applicable rules of civil procedure, the following: (A) An injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or its proceeds. (B) Appointment of a receiver to take charge of the asset transferred or its proceeds. (C) Any other relief the circumstances may require. Grupos Limitations on Power of Federal Courts to Freeze Assets to Secure Payment of a Money Judgment
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In Grupo, the Supreme Court addressed whether a federal court has inherent equitable power to provisionally freeze a defendants assets solely for the purpose of protecting the plaintiffs ability to obtain a collectible money judgment. See Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 119 S.Ct. 1961, 144 L.Ed.2d 319 (1999). Pre-Grupo Case Law In 1945, prior to the Supreme Courts decision in Grupo, the Supreme Court ruled that a preliminary injunction could not be granted solely for the purpose of sequestering assets to ensure payment of contempt penalties that might be imposed if and when the court subsequently granted a final injunction and adjudged the defendant in contempt. De Beers Consolidated Mines, Ltd. v. United States, supra 325 U.S. 212. Disagreeing about De Beerss meaning, the circuit courts by 1999 were divided on the issue of whether a federal court has the power to enter a preliminary injunction freezing the assets of a defendant before trial where the plaintiff ultimately seeks only money damages. The Ninth Circuit followed the majority rule, which authorized such provisional relief. See In re Estate of Ferdinand Marcos Human Rights Litigation, 25 F.3d 1467, 1480 (9th Cir. 1994) (We join the majority of circuits in concluding that a district court has authority to issue a preliminary injunction where the plaintiffs can establish that money damages will be an inadequate remedy due to impending insolvency of the defendant or that the defendant has engaged in a pattern of secreting or dissipating assets to avoid judgment), cert. denied, 513 U.S. 1126, 115 S.Ct. 934, 130 L.Ed.2d 879 (1995).
A minority of the circuits, including the Eleventh Circuit, ruled that federal courts do not have authority to grant such relief. Rosen v. Cascade International, Inc., 21 F.3d 1520, 1530 (11th Cir. 1994) (We repeat: preliminary injunctive relief freezing a defendants assets in order to establish a fund with which to satisfy a potential judgment for money damages is simply not an appropriate exercise of a federal district courts authority). The Grupo Case In Grupo, the plaintiffs were eleven investment funds that had purchased $75 million of $250 million in unsecured notes issued by a Mexican toll road operator (GMD) and guaranteed by GMDs subsidiaries. In August 1997, several years after issuing the notes, GMD became insolvent, or nearly insolvent, and defaulted on interest payments due on the notes. In addition to the debts owed to the investors on the notes, GMD and its subsidiaries owed $450 million to the Mexican government, Mexican banks, and other Mexican creditors. In October 1997, GMD announced that it was placing certain of its assets in trust for creditors other than the investors. GMD also announced that it had transferred its right to receive approximately $100 million to the Mexican government, apparently to pay back taxes. In December 1997, the investors filed a civil action in district court against GMD. The investors sought damages from GMD for breach of its contractual obligations on the notes. The investors also sought a preliminary injunction restraining GMD from assigning certain of its assets (receivables called Toll Road Notes), which GMD had already disclosed it planned to assign to other creditors as part of an effort to restructure GMDs debts. The investors alleged that GMD was preferring
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its Mexican creditors and that its actions, unless enjoined, would frustrate any /// judgment the investors might obtain. Significantly, the investors did not allege a claim for fraudulent transfer, nor did the investors seek any form of permanent equitable relief. The district court in Grupo granted the investors a temporary restraining order and preliminary injunction that prevented GMD and its subsidiaries from dissipating, transferring, conveying, or otherwise encumbering GMDs rights to receive or otherwise benefit from the Toll Road Notes. The district court found that GMD was at risk of insolvency and that any judgment would be frustrated if GMD was permitted to continue to prefer its Mexican creditors; the district court further found that the investors were almost certain to prevail on the merits. GMD appealed and the Second Circuit Court of Appeals affirmed. Alliance Bond Fund, Inc. v. Grupo Mexicano de Desarrollo, S.A., 143 F.3d 688 (2d Cir. 1998). The court of appeals noted that it had previously approved the use of Fed.R.Civ.P. 65 to freeze assets when those assets are the subject matter in dispute. Id., at 693 (citing Republic of Philippines v. Marcos, 806 F.2d 344 (2d Cir. 1986)). In affirming the district court, the Second Circuit stated that it join[ed] the majority of circuits in concluding that a district court has authority to issue a preliminary injunction where the plaintiffs can establish that money damages will be an inadequate remedy due to impending insolvency of the defendant or that defendant has engaged in a pattern of secreting or dissipating assets to avoid judgment. Alliance Bond Fund, Inc., supra, 143 F.3d at 696 (quoting In re Estate of Marcos, supra, 25 F.3d at 1480.
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The Supreme Court granted GMDs petition for certiorari, presumably to resolve the existing split among the circuit courts as described above. In the Supreme Court, none of the briefs submitted by the parties, nor by the United States as amicus, discussed the application of the provisional remedy provisions of the UFTA (i.e., the Uniform Fraudulent Transfer Act). This was understandable in light of the plaintiff-investors failure to allege a fraudulent transfer claim against GMD, notwithstanding its near insolvency and the likelihood that its transfers to its Mexican creditors would hinder the investors from enforcing their claims. Nevertheless, during oral argument, one or more justices asked questions about what the outcome would be if the case involved a claim to restrain or set aside a fraudulent transfer by GMD. At the close of oral argument, one of the justices asked whether a ruling in GMDs favor would necessarily be disavowing the Marcos case, or are there distinctions between the two so that Marcos could stand and you could still prevail? GMD replied that a ruling in its favor would require overruling Marcos. (The Supreme Court transcript of oral argument can be found at 1999 WL 21677.) In a narrowly written 5-4 decision issued on the last day of the term, the Supreme Court in Grupo reversed the Second Circuit. The Supreme Court concluded that federal courts do not have inherent power to grant a preliminary injunction freezing a defendants assets for the purpose of protecting the plaintiffs ability to collect a money judgment. In determining the equity power of federal courts, the Supreme Court focused on whether the equitable relief granted by the district court was available in Englands High Court of Chancery in 1789, when Congress enacted the Judiciary Act of 1789. The Supreme Court concluded that, in
1789, It was well established, however, that, as a general rule, a creditors bill could be brought by only by a creditor who had already obtained a judgment establishing the debt. Grupo, 527 U.S. at 319. The Supreme Court declined to follow the decision of Englands Court of Appeal in Mareva Compania Naviera S.A. v. International Bulkcarriers S.A., 2 Lloyds Rep. 509 (1975), in which that court held that [i]f it appears that 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 the Court has jurisdiction in a proper case to grant an interlocutory judgment so as to prevent him [sic] disposing of those assets. Grupo, 527 U.S. at 328 (quoting Mareva, 2 Lloyds Rep. at 510). Since Mareva was decided in 1975, it was not probative of the type of equitable relief available in Englands High Court of Chancery in 1789. The Supreme Court stated that it was not deciding any of the following issues: (i) whether the district courts preliminary injunction was authorized by New York law and Fed.R.Civ.P. 64 (Grupo, 527 U.S. at 318 fn. 3); (ii) whether a different outcome was required by Fed.R.Civ.P. 18(b), which permits a claim for money damages to be joined with a fraudulent conveyance claim (Grupo, 527 U.S. at 323-24); or (iii) whether the plaintiff could obtain provisional relief under fraudulent transfer law (id., at 324 fn. 7) (Because this case does not involve a claim of fraudulent conveyance, we express no opinion on the point). Perhaps for this reason, the majority decision in Grupo did not state whether it was overruling In re Estate of
Ferdinand Marcos, supra, 25 F.3d 1467, which authorized an asset freeze order when the defendant was either insolvent or has engaged in a pattern of secreting or dissipating assets to avoid judgment. Id., at 1480. Post-Grupo Developments Cases decided since Grupo illustrate its limited scope. Post-Grupo, federal courts continue to recognize that they have the power to grant provisional equitable relief when the plaintiff seeks permanent equitable relief, including the recovery of a specific asset. See United States v. Oncology Associates, P.C., supra, 198 F.3d at 496 (distinguishing Grupo, circuit court stated that when the plaintiff creditor asserts a cognizable claim to specific assets of the defendant or seeks a remedy involving those assets, a court may in the interim invoke equity to preserve the status quo pending judgment where the legal remedy might prove inadequate and the preliminary relief furthers the courts ability to grant the final relief requested); see also CSC Holdings, Inc. v. Greenleaf Electronics, Inc., 2000 WL 715601 (N.D. Ill. 2000), in which the court denied a motion to dissolve an asset freeze order and stated: 10. Continuing the asset freeze is appropriate. A court has no authority to issue a preliminary injunction preventing a party from disposing its assets pending adjudication of a claim for money damages. However, a court still has the equitable power to freeze a partys assets where injunctive relief is sought. The power to freeze assets includes cases where a combination of monetary and equitable relief is sought. . . . [] Continuing the asset freeze is appropriate because it would preserve the availability of a constructive trust as a remedy; make it easier to impound and destroy existing illegal decoders; and facilitate further equitable relief preventing future sales of pirate decoders by making it more difficult for Defendants to simply pick up
and move their enterprise to a new location. Id., at *8 (footnotes and citations omitted). Grupo also does not limit provisional injunctive relief when the final relief sought by the plaintiff consists of recovery of money by means of an equitable remedy. See United States v. Oncology Associates, P.C., supra, 198 F.3d at 498 (A constructive trust remains an equitable remedy even though it might ultimately reach a fund of money) (internal quotations and citation omitted). The Fourth Circuit in Oncology Associates approved a post-Grupo asset freeze order to protect a claim for a constructive trust because, inter alia, It is clear that this case does not present the pure money damage claim addressed in Grupo Mexicano . . . . That money damages are claimed along with equitable relief does not defeat the district courts equitable powers. Id. See also F.T. International, Ltd. v. Mason, 2000 WL 1514881 at *1-*2 (E.D. Pa. 2000) (post-Grupo asset freeze order granted where plaintiff alleged equitable claims for unjust enrichment and constructive trust). Grupo also does not limit provisional relief when the plaintiff seeks an asset freeze order under Fed.R.Civ.P. 64, which makes state law provisional remedies available in federal court. United States v. Oncology Associates, supra, 198 F.3d at 501 (affirming asset freeze order a writ of attachment and a conditional preliminary injunction pursuant to Maryland law and Fed.R.Civ.P. 64). Grupo also does not apply to claims for provisional relief to enjoin fraudulent transfers. See Grupo, 527 U.S. at 322 ( . . . . we suspect there is absolutely nothing new about debtors trying to avoid paying their debts . . . . The law of fraudulent conveyances and bankruptcy was developed to prevent such conduct; an equitable power to restrict a debtors use of his unencumbered property before judgment was not).
Post-Grupo, plaintiffs may utilize the provisional remedies provisions of the UFTA, made available by Fed.R.Civ.P. 64, to enjoin fraudulent transfers. Section 3439.07 of Californias UFTA, Civ. Code 3439 et seq., authorizes a court to grant injunctive relief and [a]ny other relief the circumstances may require in connection with a creditors claim to set aside a fraudulent transfer. Finally, a recent Ninth Circuit decision suggests that Grupo may not apply when the asset freeze order has limited scope. See Walczak v. EPL Prolong, Inc., 198 F.3d 725, 730 (9th Cir. 1999) (distinguishing Grupo, circuit court stated that preliminary injunction preventing consummation of stock swap was not a freeze order because this injunction does not completely prohibit Appellants from taking any action with regard to their assets, so that the injunction in this case is distinguishable from the injunction in Grupo Mexicano). Standards Applied under Fed.R.Civ.P. 65 in Determining Whether to Issue an Asset Freeze Order General Rules Although Fed.R.Civ.P. 65 is not a source of power for the granting of asset freeze orders, Rule 65 nevertheless sets standards that must, in general, be satisfied in order to obtain a temporary restraining order or preliminary injunction freezing assets. In determining whether to grant a preliminary injunction which freezes assets against a potential recovery, we apply the standard test used in this circuit to evaluate claims for preliminary injunctive relief. FTC v. Evans Products Co., 775 F.2d 1084, 1088 (9th Cir. 1985). Under the first part of this test, the movant must show 1) irreparable injury, 2) probable success on the merits, 3) a balance of hardships that tips in the movants favor, and 4) that a preliminary injunction is in the public interest. Id. Alternatively, a court may issue an injunction if the
moving party demonstrates either a combination of probable success on the merits and irreparable injury or that serious questions are raised and the balance of hardships tips in his favor. Id., at 1088-89. Although Evans Products, supra, 775 F.2d 1084, correctly states the general rule, a different standard will sometimes apply in government enforcement proceedings, as discussed below. See, e.g., FTC v. Warner Communications, Inc., 742 F.2d 1156, 1159 (9th Cir. 1984) (15 U.S.C. 53(b) places a lighter burden on the Commission than that imposed on private litigants by the traditional equity standard . . . .). The leading Ninth Circuit case on the general standards for issuance of a preliminary injunction states: One moving for a preliminary injunction assumes the burden of demonstrating either a combination of probable success and the possibility of irreparable injury or that serious questions are raised and the balance of hardships tips sharply in his favor. Benda v. Grand Lodge of Intern. Assn of Machinists & Aerospace Workers, 584 F.2d 308, 31415 (9th Cir. 1978) (Benda), cert. dismissed, 441 U.S. 937, 99 S.Ct. 2065, 60 L.Ed.2d 667 (1979) (quoting Wm. Inglis & Sons Baking & Co. v. ITT Continental Baking Co., 526 F.2d 86, 88 (9th Cir. 1975)). These two tests are not really entirely separate tests, but merely extremes of a single continuum. Benda, 584 F.2d at 315. The critical element in determining the test to be applied is the relative hardship to the parties. If the balance of harm tips decidedly toward the plaintiff, then the plaintiff need not show as robust a likelihood of success on the merits as when the balance tips less
decidedly. [Citation omitted.] No chance of success at all, however, will not suffice. The irreducible minimum has been described by one court as a fair chance of success on the merits, [citation omitted], while another has said the questions must be serious enough to require litigation, [citation omitted]. The difference between the two formulations is insignificant. Therefore, we accept either as satisfactory. Benda, 584 F.2d at 315. Under any formulation of the test [for a preliminary injunction], plaintiff must demonstrate that there exists a significant threat of irreparable injury. Oakland Tribune, Inc. v. The Chronicle Publishing Co., Inc., 762 F.2d 1374, 1376 (9th Cir. 1985). Special Rule in Government Enforcement Proceedings In a government enforcement proceeding, the test for provisional injunctive relief will sometimes be different than the test applicable to civil litigation filed by a non-governmental entity. [T]he fact that a federal statute is being enforced by the agency charged with that duty may alter the burden of proof of a particular element necessary to obtain injunctive relief. United States v. Odessa Union Warehouse Coop, 833 F.2d 172, 175 (9th Cir. 1987). See, e.g., FTC v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999) (15 U.S.C. 53(b) imposes a more lenient standard on the FTC so that it need not show irreparable injury to obtain a preliminary injunction). In Odessa Union, the United States brought an enforcement action for violations of the Food, Drug, and Cosmetic Act. The defendant conceded that it had violated the Act, but disputed whether injunctive relief should be granted. In affirming the injunction, the Ninth Circuit stated: Where an injunction is authorized by statute, and the statutory conditions are satisfied as in the facts presented here, the agency to
whom the enforcement of the right has been entrusted is not required to show irreparable injury. Odessa Union, 833 F.2d at 175 (footnote omitted). In United States v. Nutri-Cology, Inc., 982 F.2d 394, 397-98 (9th Cir. 1992), the Ninth Circuit distinguished Odessa Union and explained that the government in a statutory enforcement proceeding is entitled to a presumption of irreparable injury only when the statutory violations are conceded or when the government shows that it is likely to succeed on the merits of its claims: In statutory enforcement cases where the government has met the probability of success prong of the preliminary injunction test, we presume it has met the possibility of irreparable injury prong because the passage of the statute is itself an implied finding by Congress that violations will harm the public. NutriCology, supra, 982 F.2d at 398. Some statutes expressly waive the requirement that the government agency show irreparable injury. See, e.g., 12 U.S.C. 1821(d)(19)(A) (in action by conservator of federally insured financial institution, Rule 65 of the Federal Rules of Civil Procedure shall apply with respect to any proceeding [for provisional injunctive relief] under paragraph (18) without regard to the requirement of such rule that the applicant show that the injury, loss, or damage is irreparable and immediate); see FDIC v. Garner, 125 F.3d 1272, 1279 (9th Cir. 1997) (Other courts have held that this provision does not eliminate the requirement for demonstrating some form of injury). /// The mere cessation of violations is not a defense to a government enforcement action for injunctive relief. Odessa Union, supra, 833 F.2d at 176 (Moreover, cessation of violations does not itself foreclose issuance of an injunction. Courts must beware of attempts to forestall
injunctions through remedial efforts and promises of reform that seem timed to anticipate legal action, especially when there is the likelihood of recurrence) (citations omitted). Examples of Cases Weighing Whether to Freeze Assets FTC v. Affordable Media In FTC v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999), the Ninth Circuit decided whether an asset freeze order granted to the FTC was too onerous to the defendants. In finding that the district court did not abuse its discretion in granting the order, the Ninth Circuit noted the limited scope of the order: The Andersons also argue that the district court ignored the hardships borne by the Andersons and Financial because of the issuance of the preliminary injunction. This argument ignores the fact that the district court released monies to pay Inter Coms operating expenses, to pay Inter Coms employees, and to pay for the Andersons living expenses and attorneys fees. Therefore, the burden of the preliminary injunction, although not insubstantial, is not as great as the Andersons claim. Id., 179 F.3d at 1236 (footnote omitted). FTC v. H.N. Singer, Inc. In FTC v. H.N. Singer, Inc., supra, 668 F.2d 1107, the Ninth Circuit found that the asset freeze order was justified because: (1) the defendants were already out of business, so that an asset freeze order would not unduly disrupt their business; and (2) the defendants activities lead to the conclusion that, absent a freeze, they would either dispose of, or conceal, or send abroad, all of the moneys that they have obtained from their victims. Id., at 1113. In arriving at this conclusion,
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the Ninth Circuit quoted with approval the following language from SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir. 1972): . . . [T]he decision to order a temporary freeze on defendants assets as ancillary relief in an SEC enforcement action requires particularly careful consideration by the district court. One of the chief reasons for requiring defendants to refund illegally obtained proceeds of a public offering is to compensate defrauded investors. To effect this purpose there may be circumstances where a district court should temporarily freeze defendants assets to insure that they will be available to compensate public investors. Freezing assets under certain circumstances, however, might thwart the goal of compensating investors if the freeze were to cause such disruption of defendants business affairs that they would be financially destroyed. Thus, the disadvantages and possible deleterious effect of a freeze must be weighed against the considerations indicating the need for such relief. Id., 458 F.2d at 1105-06. FTC v. Evans Products In FTC v. Evans Products Co., supra, 775 F.2d 1084, the Ninth Circuit found that the trial court did not abuse its discretion in denying an asset freeze order sought by the FTC in an enforcement action under 15 U.S.C. 53(b): i. The potential for irreparable harm in this case is limited. We find no evidence that Evans is, or is likely to, secret[e] away assets before relief can be effectuated. Moreover, Evans status as a debtor in Chapter 11 limits its ability to transfer assets to the disadvantage of potential judgment creditors. Id., 775 F.2d at 1089. ii. The balance of hardships favors Evans. If the FTCs ancillary relief were granted, Evans would be required
to maintain and pay taxes on several hundred homes during the pendency of the FTCs permanent injunction action, and the marketability of Evans consumer financing notes would be impaired at a time when interest rates places these mortgages at what Evans avers may be their maximum worth. On the other hand, in the absence of ancillary relief, Evans customers may still obtain relief through state court action tailored to the specific misrepresentations alleged in their individual cases. Id. iii. In light of the serious harm which ancillary relief could cause to Evans precarious financial position, the availability of private actions, and the lack of evidence that Evans assets will be insufficient to satisfy potential judgments absent ancillary relief, we hold that the district court did not abuse its discretion in declining to exercise its inherent equitable powers. Id. SEC v. Manor Nursing In SEC v. Manor Nursing Centers, Inc., supra, 458 F.2d at 1106, the circuit court found that defendants fraudulent conduct justified an asset freeze order: Here, while the question is a close one, we are satisfied that in balance the district courts decision temporarily to freeze appellants assets was justified. Because of the fraudulent nature of appellants violations, the court could not be assured that appellants would not waste their assets prior to refunding public investors money. Moreover, at the time the courts order was entered, a great deal of uncertainty existed with respect to the total amount of proceeds received and their location. Appellants failure to present evidence to remove this uncertainty warranted a measure designed to preserve the status quo
while to court could obtain an accurate picture of the whereabouts of the proceeds of the public offering. In addition, the continued failure of some appellants to furnish the information necessary to a complete understanding of the current situation justified extension of the temporary freeze until appellants have refunded the proceeds. Under the circumstances, we hold that there is no basis for disturbing the district courts finding that the temporary freeze was necessary to protect the public interest. Id., 458 F.2d at 1106 (footnote omitted). Examples of Cases Addressing Living Expenses and Attorney Fee Issues in Asset Freeze Litigation Living Expenses In Marcos, the Ninth Circuit affirmed an asset freeze order that enjoined the Marcoses from disposing of any of their assets save for the payment of attorney fees and normal living expenses. Marcos, 862 F.2d at 1358. In arriving at this result, the circuit court stated: The Marcoses have offered no evidence of any hardship they would suffer if the injunction were issued. Indeed, the district court stipulated in the injunction that the Marcoses may use their assets to cover normal living expenses and legal fees. Irreparable injury was weighed against zero evidence of hardship. On this record, the balance of hardships tipped decidedly in the Republics favor. Id., at 1362. See also SEC v. Coates, 1994 WL 455558 (S.D.N.Y 1994) (finding that defendant had adequate income from other sources and the defendants claimed expenses were inflated and unnecessary, court refused to modify asset freeze order to permit payment of defendants living expenses). Attorney Fees i. In General
A district court may, within its discretion, forbid or limit payment of attorney fees out of frozen assets. CFTC v. Noble Metals International, Inc., 67 F.3d 766, 775 (9th Cir. 1995), cert. denied, 519 U.S. 815, 117 S.Ct. 64, 136 L.Ed.2d 26 (1996); see FSLIC v. Ferm, 909 F.2d 372, 375 (9th Cir. 1990) (approving limitation on attorney fees); see also SEC v. Coates, supra, 1994 WL 455558 at *3 (in refusing to modify asset freeze order to permit defendant to retain defense counsel, court found no basis upon which this court could conclude that [defendants] legal defense is of critical importance to investors . . . .). In Noble Metals, supra, 67 F.3d 766, the Ninth Circuit upheld an asset freeze order that precluded payment of the defendants attorney fees. The circuit court explained: According to the record, the frozen assets fell far short of the amount needed to compensate Nobles and Moorgates customers. This was reason enough in the circumstances of this case for the district court, in the exercise of its discretion, to deny the attorney fee application. [Citations omitted.] We do not, however, intimate that attorney fee applications may always be denied where the assets are insufficient to cover the claims. Discretion must be exercised by the district court in light of the fact that wrongdoing is not yet proved when the application for attorney fees is made. Id., at 775. In SEC v. Current Financial Services, 62 F.Supp.2d 66, 69 (D.C. Cir. 1999), the district court refused to modify an asset freeze order to permit defendant to pay attorney fees from frozen assets because, inter alia, (1) A defendant is not entitled to foot his legal bill with funds that are tainted by his fraud, and (2) the amount of money defrauded from the investors heavily outweighs the amount of money in the frozen
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account, and therefore, the Court finds it irrelevant that the funds are not traceable to investor funds. ii. Retainers Depending on the terms of the retainer agreement between the client and its law firm, an asset freeze order may reach a retainer/deposit given to a law firm before the effective date of the asset freeze order against the client: 1. If the retainer is an advance deposit against future fees, then the unearned portion of the retainer belongs to the client and can be frozen by an asset freeze order. SEC v. Interlink Data Network of Los Angeles, Inc., 77 F.3d 1201, 1205 (9th Cir. 1996) (court remanded case for hearing on whether asset freeze order encompassed retainer held by law firm; court stated that the freeze order may have precluded law firm from drawing on retainer because the law firms fee agreement created an advance deposit against future fees that remained property of [the defendant] until services were rendered). 2. In SEC v. Credit Bancorp, Ltd., 109 F.Supp.2d 142, 144-46 (S.D.N.Y. 2000), the court determined that a retainer held in a law firms trust account remained property of the client, and was therefore subject to an asset freeze order against the client, even though the firm had rendered services that had not been paid. In arriving at this conclusion, the court focused on the terms of the law firms retainer agreement, which indicated that the retainer did not become property of the law firm until the retainer was transferred from the client trust account of the law firm to its general account. The court declined to decide whether the
law firm had a right to set-off its claim for unpaid services against the retainer. 3. In CFTC v. Co Petro Marketing Group, Inc., 700 F.2d 1279 (9th Cir. 1983), the circuit court affirmed an order requiring a law firm to disgorge a $60,000 retainer. On May 7, 1980, the district court filed an asset freeze order against Co Petro. On May 8, 1980, the law firm received a $60,000 cashiers check, and the law firm knew that Co Petro was the source of the $60,000. The law firm alleged that it did not know of the terms of the asset freeze order until after receiving the $60,000 cashiers check. At the time the law firm received the check, the law firm knew that the CFTC was seeking an asset freeze order against Co Petro and that the district court had issued a decision on May 7. The Ninth Circuit ruled that the law firms ignorance of the terms of the asset freeze order was not a defense: As an officer of the court, [the law firm] was under a duty to inquire as to the exact terms of the district courts decision before depositing the check. Consequently, we agree with the district court that [the law firm] violated the permanent injunction against transfer of Co Petro assets when it deposited the check. 700 F.2d at 1285. iii. Forfeitures and Restraining Orders That Preclude Attorney Fees In United States v. Monsanto, 491 U.S. 600, 109 S.Ct. 2657, 105 L.Ed.2d 512 (1989), the Supreme Court affirmed an asset freeze order under 21 U.S.C. 853(e) that precluded the accused from paying counsel fees with assets shown likely to be subject to forfeiture. In Monsanto, the Supreme Court explained: Put another way: if the
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Government may, post-trial, forbid the use of forfeited assets to pay an attorney, then surely no constitutional violation occurs when, after probable cause is adequately established, the Government obtains an order barring a defendant from frustrating that end by dissipating his assets prior to trial. 491 U.S. at 616. On remand from the Supreme Court, the Second Circuit Court of Appeals decided that the Fifth and Sixth Amendments of the U.S. Constitution entitled the defendant to a pre-trial hearing concerning whether the restraining order should be modified to permit payment of counsel fees: We conclude that (1) the fifth and sixth amendments, considered in combination, require an adversary, post-restraint, pretrial hearing as to probable cause that (a) the defendant committed crimes that provide a basis for forfeiture, and (b) the properties specified as forfeitable in the indictment are properly forfeitable, to continue a restraint of assets (i) needed to retain counsel of choice and (ii) ordered ex parte pursuant to 21 U.S.C. 853(e)(1)(A) (1988); and (2) consistent with 21 U.S.C. 853(e)(3) (1988), the court may receive and consider at such a hearing evidence and information that would be inadmissible under the Federal Rules of Evidence; and (3) grand jury determinations of probable cause may be reconsidered in such a hearing. United States v. Monsanto, 924 F.2d 1186, 1202 (2d Cir.) (en banc), cert. denied, 502 U.S. 943, 112 S.Ct. 382, 116 L.Ed.2d 333 (1991); see also United States v. Unimex, 991 F.2d 546, 551 (9th Cir. 1993) (reversing criminal conviction of corporation (Unimex) whose assets were seized prior to trial: Unimexs right to counsel under the Sixth Amendment and to Due Process under the Fifth Amendment were violated by taking away all of its assets, denying it an opportunity to show cause prior to
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criminal trial that an amount it could have used for attorneys fees was nonforfeitable, and then forcing it to trial without counsel). Addressing the Supreme Courts Monsanto decision in the context of a civil enforcement proceeding by the SEC, the Seventh Circuit ruled that Monsanto did not require the district court to modify a freeze order to permit the defendants to pay defense counsel because, inter alia, the defendants refused to submit an accounting which would reveal which funds, if any, were not proceeds of their securities trading activity. SEC v. Cherif, 933 F.2d 403, 417 (7th Cir. 1991), cert. denied, 502 U.S. 1071, 112 S.Ct. 966, 117 L.Ed.2d 131 (1992); see also SEC v. Current Financial Services, supra, 62 F.Supp.2d at 67 (in refusing to modify asset freeze order to permit defendant to retain civil defense counsel, court observed that the Sixth Amendment provides defendants the right to counsel only in criminal, not civil, proceedings). Notice Requirements for Obtaining Order under Fed.R.Civ.P. 65 Notice Requirement for Preliminary Injunction Fed.R.Civ.P. 65(a)(1) provides that No preliminary injunction shall be issued without notice to the adverse party. However, giving notice may defeat the purpose of the asset freeze order if the defendant is involved in secreting assets or other fraudulent activities. In that event, the moving party may need to seek a temporary restraining order. Local Civil Rule 7.4.1 requires a pre-filing conference among counsel before the filing of motions. Rule 7.4.1 exempts from this requirements applications for temporary restraining orders, but does not exempt preliminary injunction motions. Notice Requirement for TRO Fed.R.Civ.P. 65(b) authorizes a temporary restraining order to be issued without written or oral notice to the adverse party of that partys
attorney only if (1) it clearly appears from specific facts shown by affidavit or by the verified complaint that immediate and irreparable injury, loss, or damage will result to the applicant before the adverse party or that partys attorney can be heard in opposition, and (2) the applicants attorney certifies to the court in writing the efforts, if any, which have been made to give the notice and the reasons supporting the claim that notice should not be required. Courts disfavor ex parte applications. See, e.g., Mission Power Engineering Co. v. Continental Casualty Co., 883 F.Supp. 488, 489 (C.D. Cal. 1995); In re Intermagnetics America, Inc., 101 B.R. 191 (C.D. Cal. 1989). A plaintiff seeking an ex parte asset freeze order should thoroughly justify the need for ex parte relief. See, e.g., (Suppressed) v. (Suppressed), 109 F.Supp.2d 902 (N.D. Ill. 2000), in which the court granted an ex parte temporary asset freeze order and stated: Plaintiffs request for ex parte consideration of the motion was amply supported, as required by Fed.R.Civ.P. 65(b), by affidavits indicating that if plaintiff were required to give notice of the order, there would be a significant risk that defendants would destroy or conceal the descrambling devices, their books and records, and/or their assets. The Court likewise concluded that plaintiff had demonstrated all of the factors necessary to obtain a temporary restraining order barring defendants from selling the devices; permitting plaintiff, via the United States Marshal, to enter defendants premises and seize records; and to freeze defendants assets for a brief period until a full hearing could be held. See Fed.R.Civ.P. 65(b) (temporary restraining order issued ex parte may last no more than ten days). Id., 109 F.Supp.2d at 903-04. Fed.R.Civ.P. 65(b) states that any TRO granted without notice shall be indorsed with date and hour of issuance; shall be filed
forthwith in the clerks office and entered of record; shall define the injury and state why it is irreparable and why the order was granted without notice; and shall expire by its terms within such time after entry, not to exceed 10 days, as the court fixes, unless within the time so fixed the order, for good cause shown, is extended for a like period or unless the party against whom the order is directed consents that it may be extended for a longer period. The reasons for the extension shall be entered of record. In case a temporary restraining order is granted without notice, the motion for a preliminary injunction shall be set down for hearing at the earliest possible time and take precedence of all matters except older matters of the same character. . . . See also Local Civil Rule 7.18 (governing ex parte applications). Evidentiary Issues in Litigation under Fed.R.Civ.P. 65 Use of Inadmissible Evidence A federal court may give weight to inadmissible evidence in deciding whether to grant a preliminary injunction. Marcos, 862 F.2d at 1363 (It was within the discretion of the district court to accept this hearsay for purposes of deciding whether to issue the preliminary injunction); Flynt Distrib. Co., Inc. v. Harvey, 734 F.2d 1389, 1394 (9th Cir. 1984) (The urgency of obtaining a preliminary injunction necessitates a prompt determination and makes it difficult to obtain affidavits from persons who would be competent to testify at trial. The trial court may give even inadmissible evidence some weight, when to do so serves the purpose of preventing irreparable harm before trial). /// Local Civil Rule 7.5.3 states that declarations shall contain only factual, evidentiary matter and shall conform as far as possible with the requirements of F.R.Civ.P. 56(e). Rule 56(e) states that affidavits shall
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be made on personal knowledge, [and] shall set forth such facts as would be admissible in evidence . . . . Use of Evidence at Trial and Consolidation with Trial on Merits Evidence received at the preliminary injunction hearing may be considered at trial, and the trial on the merits may be consolidated with the preliminary injunction hearing. See Fed.R.Civ.P. 65(a)(2). Even when consolidation is not ordered, any evidence received upon a motion for a preliminary injunction which would be admissible upon the trial on the merits becomes a part of the trial record and need not be repeated at trial. Id. Rule 65(a)(2) states that it shall be construed and applied as to save to the parties any rights they may have to trial by jury. Live Testimony at Preliminary Injunction Hearing Local Civil Rule 7.5.4 provides that, not less than ten days prior to a scheduled hearing on a preliminary injunction, a party may file a request to cross-examine a declarant who is not beyond the subpoena power of the Court and who is reasonably available to the party who offered the declarants declaration. Persons Bound by and Territorial Reach of Asset Freeze Order under Fed.R.Civ.P. 65 Persons Bound by Order Fed.R.Civ.P. 65(d) states: Every order granting an injunction and every restraining order . . . is binding only upon the parties to the action, their officers, agents, servants, employees, and attorneys, and upon those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise. The purpose of Rule 65(d) is in essence to ensure that defendants may not nullify a decree by carrying out prohibited acts through aiders
and abettors, although they were not parties to the original proceeding. Select Creations, Inc. v. Paliafito America, Inc., 852 F.Supp. 740, 779 (E.D. Wis. 1994) (quotations and citations omitted). Aider and abettor liability under Rule 65(d) requires (1) intent plus (2) an overt act designed to aid in the success of the venture. Select Creations, supra, 852 F.Supp. at 779. A related issue is whether an asset freeze order may be granted against a third party not accused of wrongdoing. The SEC has obtained such orders. See SEC v. The Better Life Club of America, Inc., 995 F.Supp. 167, 180 (D.D.C. 1998) (SEC was entitled to disgorgement order against transferees of securities law violators because It is clear that a gratuitous donee of fraudulently obtained funds is not a bona fide purchaser and may be subject to a constructive trust); see also SEC v. Lybrand, 2000 WL 913894, at * 12 (S.D.N.Y. 2000) (in granting asset freeze order against certain trusts, court stated: Federal courts may order equitable relief against a person who is not accused of wrongdoing in a securities enforcement action where that person: (1) has received ill-gotten funds; and (2) does not have a legitimate claim to those funds) (citations and quotations omitted). Territorial Reach of Order If the court has in personam jurisdiction of a party, then an injunction against that party can prevent it from dissipating its assets no matter where they are located. See, e.g., Marcos, 862 F.2d at 1364 (Because the injunction operates in personam, not in rem, there is no reason to be concerned about its territorial reach). See FTC v. Affordable Media, LLC, supra, 179 F.3d at 1238-44 (affirming contempt decree against defendants for failing to comply with preliminary injunction directing defendants to repatriate the assets in their Cook Islands trust); see also Haisten v. Grass Valley Medical Reimbursement
Fund, Ltd., 784 F.2d 1392, 1396 (9th Cir. 1985) (district court had in personam jurisdiction of Cayman Islands entity, because it intentionally caused effects in California); Fed.R.Civ.P. 4(f) (methods for service of process on foreign residents). A court is authorized to impose a preliminary injunction on assets which were controlled by a party, even if that party did not expressly own or possess those assets. FDIC v. Garner, 125 F.3d 1272, 1280 (9th Cir. 1997). /// /// Bond Requirement of Fed.R.Civ.P. 65(c) Fed.R.Civ.P. 65(c) states: No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained. No such security shall be required of the United States or . . . an agency thereof . . . . A party is wrongfully enjoined within the meaning of Rule 65(c) when it turns out the party enjoined had the right all along to do what it was enjoined from doing. Nintendo of America, Inc. v. Lewis Galoob Toys, Inc., 16 F.3d 1032, 1036 (9th Cir.), cert. denied, 513 U.S. 822, 115 S.Ct. 85, 130 L.Ed.2d 37 (1994). In Nintendo, the Ninth Circuit ruled: we join what appears to be the majority [rule] and hold there is a rebuttable presumption that a wrongfully enjoined party is entitled to have the bond executed and recover provable damages up to the amount of the bond. Id., at 1036. Rule 65(c) grants district courts wide discretion in setting the amount of a security bond. Walczak v. EPL Prolong, Inc., supra, 198
F.3d at 733. Certain statutes excuse the posting of a bond. See, e.g., 15 U.S.C. 78u(d)(1) (SEC may obtain preliminary injunction or temporary restraining order without posting a bond); Fed.R.Bankr.P. 7065 (bankruptcy trustee may obtain preliminary injunction or temporary restraining order without posting a bond). Appeal of Preliminary Injunctions under Fed.R.Civ.P. 65 An order granting injunctive relief can be appealed, even if the order is otherwise interlocutory. 28 U.S.C. 1292(a)(1) states: (a) Except as provided in subsections (c) and (d) of this section, the court of appeal shall have jurisdiction of appeals from: [] (1) Interlocutory orders of the district courts of the United States . . . granting, continuing, modifying, refusing or dissolving injunctions, or refusing to dissolve or modify injunctions, except where a direct review may be had in the Supreme Court . . . . The filing of an appeal does not automatically stay the injunction. Fed.R.Civ.P. 62(a) states in relevant part: Unless otherwise ordered by the court, an interlocutory or final judgment in an action for an injunction or in a receivership action . . . shall not be stayed during the period after its entry and until an appeal is taken or during the pendency of the appeal . . . . a. Fed.R.Civ.P. 62(c) states in relevant part: When an appeal is taken from an interlocutory or final judgment granting, dissolving, or denying an injunction, the court in its discretion may suspend, modify, restore, or grant an injunction during the pendency of the appeal upon such terms as to bond or otherwise as it considers proper for the security of the rights of the adverse party. . . .
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b.
Fed.R.Civ.P. 62(g) states in relevant part: The
provisions of this rule do not limit any power of an appellate court or a judge or justice thereof to stay proceedings during the pendency of an appeal or to suspend, modify, restore, or grant an injunction during the pendency of an appeal or to make any order appropriate to preserve the status quo or the effectiveness of the judgment subsequently to be entered. The standard of review on appeal is the lenient abuse of discretion standard. The grant or denial of a preliminary injunction ordinarily will be reversed only if there has been an abuse of discretion by the lower court. Benda v. Grand Lodge of Intern. Assn of Machinists & Aerospace Workers, supra, 584 F.2d at 314. Contempt Sanctions for Violating Preliminary Injunction Civil versus Criminal Contempt Violation of a preliminary injunction or temporary restraining order may be punished as contempt. A contempt sanction may be either civil or criminal in nature. SEC v. Credit Bancorp, Ltd., 2000 WL 968010, at *2 (S.D.N.Y. 2000); SEC v. American Board of Trade, Inc., 830 F.2d 431, 439 (2d Cir. 1987) (When a district courts order has been violated, the court may impose either civil contempt remedies or criminal contempt sanctions, or both). A contempt sanction, whether civil or criminal, can take the form of incarceration and/or imposition of a monetary fine. SEC v. Credit Bancorp., supra, 2000 WL 968010, at *3. A criminal sanction is imposed retrospectively, to punish a completed act of disobedience. A contempt sanction is civil if it serves to compensate the complainant for losses
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sustained or is designed to coerce the defendant into compliance. Id., at *2. The imposition of either civil or criminal contempt sanctions must comport with due process. SEC v. Credit Bancorp, Ltd., supra, 2000 WL 968010 at *3. A criminal contempt requires proof beyond a reasonable doubt and the defendant has a right to jury trial and other criminal procedural protections. See id. Those protections do not apply in a civil contempt proceeding. Id. The standard for finding a party in civil contempt is: The moving party has the burden of showing by clear and convincing evidence that the contemnors violated a specific and definite order of the court. The burden then shifts to the contemnors to demonstrate why they were unable to comply. FTC v. Affordable Media, LLC, supra, 179 F.3d at 1239 (quotations and citation omitted). A court has the power to adjudge in civil contempt any person who willfully disobeys a specific and definite order requiring him to do or refrain from doing an act. Shuffler v. United Heritage Bank, 720 F.2d 1141, 1146 (9th Cir. 1983). Sanctions for civil contempt can be imposed for one or both of two distinct purposes: (1) to compel or coerce obedience to a court order . . . ; and (2) to compensate the contemnors adversary for injuries resulting from the contemnors noncompliance . . . . Shuffler v. Heritage Bank, supra, 720 F.2d at 1147. The Inability to Comply Defense in Asset Freeze Litigation A partys inability to comply with a judicial order constitutes a defense to a charge of civil contempt. FTC v. Affordable Media, LLC, supra, 179 F.3d at 1239 (citing United States v. Rylander, 460 U.S. 752, 757, 103 S.Ct. 1548, 75 L.Ed.2d 521 (1983)). However, in Affordable Media, the Ninth Circuit affirmed a civil contempt decree
notwithstanding the defendants assertion that they had no ability to comply with an order requiring them to repatriate assets in their Cooks Islands trust. In doing so, the Ninth Circuit explained that: (1) the defendants had the burden of proving their impossibility defense; and (2) In the asset protection trust context, moreover, the burden on the party asserting an impossibility defense will be particularly high because of the likelihood that any attempted compliance with the courts orders will be merely a charade rather than a good faith effort to comply. Affordable Media, 179 F.3d at 1241. See also SEC v. Credit Bankcorp, Ltd., supra, 2000 WL 968010 at *6 (contemnor failed to carry his burden of showing an inability to comply with courts order); In re Lawrence, 251 B.R. 630 (S.D. Fla. 2000) (self-created impossibility in transferring assets into trust was not a defense to civil contempt for violating order to turn over trust assets, notwithstanding defendants contention that it was currently impossible to comply with the turnover order). PARALLEL PROCEEDING ISSUES IN ASSET FREEZE LITIGATION Stay of Civil Proceeding Pending Resolution of Criminal and Fifth Amendment Issues The target of civil asset freeze litigation may also be the target of a related criminal investigation or proceeding. The defendant may want to stay the civil asset freeze litigation in order to avoid testifying until after resolution of all criminal issues. The case law gives a federal district court broad discretion to permit the civil asset freeze litigation to proceed notwithstanding a pending related criminal investigation or proceeding. The Constitution does not ordinarily require a stay of civil proceedings pending the outcome of criminal proceedings. Keating v.
Office of Thrift Supervision, 45 F.3d 322, 324 (9th Cir. 1995), cert. denied, 516 U.S. 827, 116 S.Ct. 94, 133 L.Ed.2d 49 (1995) (Keating). In the absence of substantial prejudice to the rights of the parties involved, [simultaneous] parallel [civil and criminal] proceedings are unobjectionable under our jurisprudence. Keating, 45 F.3d at 324 (quoting SEC v. Dresser Industries, 628 F.2d 1368, 1374 (D.C. Cir.), cert. denied, 449 U.S. 993, 101 S.Ct. 529, 66 L.Ed.2d 289 (1980) (Dresser). Nevertheless, a court may decide in its discretion to stay civil proceedings . . . when the interests of justice seem [ ] to require such action. Keating, 45 F.3d at 324 (quoting Dresser, 628 F.2d at 1375 and United States v. Kordel, 397 U.S. 1, 12 fn. 27, 90 S.Ct. 763, 25 L.Ed.2d 1 (1970)); see FSLIC v. Molinaro, 889 F.2d 899, 902 (9th Cir. 1989) (Molinaro) (While a district court may stay civil proceedings pending the outcome of parallel criminal proceedings, such action is not required by the Constitution). The case for staying civil proceedings is a far weaker one when [n]o indictment has been returned [, and] no Fifth Amendment privilege is threatened. Molinaro, 889 F.2d at 903 (quoting Dresser, 628 F.2d at 1376). In deciding whether to grant a stay of a civil proceeding pending the outcome of parallel criminal proceedings, the court should consider the extent to which the defendants fifth amendment rights are implicated. Keating, 45 F.3d at 324 (quoting Molinaro, 889 F.2d at 902). See Applied Materials, Inc. v. Semiconductor Spares, Inc., 1995 WL 261451 at *4 fn. 1 (N.D. Cal. 1995) (in denying stay motion, court noted that corporate defendant did not have a fifth amendment privilege because corporations have no fifth amendment rights). In addition, in deciding whether to grant a stay, the decisionmaker should generally consider the following factors: (1) the interest of the plaintiffs in proceeding expeditiously with this litigation or any particular aspect
of it, and the potential prejudice to plaintiffs of a delay; (2) the burden which any particular aspect of the proceedings may impose on defendants; (3) the convenience of the court in the management of its cases, and the efficient use of judicial resources; (4) the interests of persons not parties to the civil litigation; and (5) the interest of the public in the pending civil and criminal litigation. Keating, 45 F.3d at 324-25 (citing Molinaro, 889 F.2d at 903)). Evidence that the defendant has a history of hiding assets militates against a stay of the civil proceeding, even when the court in the civil proceeding has already granted provisional injunctive relief. See, e.g., J.K. Publications, Inc., 99 F.Supp.2d at 1197 (C.D. Cal. 2000) (in denying stay, court noted that plaintiff FTC would be prejudiced by further delay because, among other things, [a]s the record in this case shows, Ken Taves has a history of hiding and attempting to dispose of his assets). Similarly, in Applied Materials, Inc. v. Semiconductor Spares, Inc., supra, 1995 WL 261451, the court rejected defendants contention that an asset freeze order justified staying the civil action pending the outcome of a related criminal investigation: While defendant Biehl has some fifth amendment interests in staying this case, the interests of plaintiffs, the court, and the public in proceeding promptly with this litigation outweigh that interest. Id. at *4. The timing of the stay motion, i.e., whether the motion is filed early or late in the case, may affect whether it is granted. See, e.g., J.K. Publications, 99 F.Supp.2d at 1197 (in denying defendants motion for a stay, court noted that This case is now over fifteen months old). Whether the defendant has already testified may also affect whether the defendants stay motion is granted. Where a defendant already has provided deposition testimony on substantive issues of the civil case, any burden on that defendants Fifth Amendment privilege is
negligible. J.K. Publications, 99 F.Supp.2d at 1199 (quoting Molinaro, 889 F.2d at 903)). Fifth Amendment self-incrimination issues may limit the scope of relief obtained in an asset freeze order. See, e.g., (Suppressed v. Suppressed), 109 F.Supp.2d 902, 904 (N.D. Ill. 2000), in which the district court froze assets ex parte but refused to issue an ex parte order requiring defendants to make an accounting: As disclosed by plaintiff in its ex parte motion, the sale of decoding devices like those defendants are claimed to have offered and sold is prohibited by federal criminal statute . . . . Under the circumstances, information disclosing defendants purchases and sales of the devices . . . might tend to incriminate the defendants . . . . It is difficult for this Court to imagine how an ex parte order compelling the individual defendants to provide such information can coexist with the Fifth Amendment . . . . It is highly unlikely that an ordinary citizen, confronted with such a show of force and served with a federal court order directing him to provide information (some of it immediately), would have the faintest idea that he had the right to refuse to do so. Certainly nothing within the order proposed by plaintiff directed the agents to advise the defendants of their constitutional right to refuse to provide the information, and even if such a provision were added (an option the Court also considered), the same ordinary citizen might not be expected to understand such advice from a law enforcement agent as trumping a judges order directing disclosure. Id., 109 F.Supp.2d at 904-05 (footnote omitted). However, in FTC v. H.N. Singer, Inc., supra, 668 F.2d 1107, the Ninth Circuit rejected a Fifth Amendment challenge to an asset freeze order that required the defendants to produce documents concerning their assets:
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Appellants argue, however, that the act of producing documents in response to the order may amount to authenticating them, and thus be compelled self-incrimination. In the case of particular documents, that might be so. But that possibility is not a valid ground for holding that the order is void. . . . If, as to a particular documents, an appellant believes that his producing it may, by authenticating it, incriminate him, he must make a showing to that effect, so that the court can evaluate it. He cannot simply refuse to comply with the order at all. 668 F.2d at 1114 (citations omitted). Further, [n]ot only is it permissible to conduct a civil proceeding at the same time as a related criminal proceeding, even if that necessitates invocation of the Fifth Amendment privilege, but it is even permissible for the trier of fact to draw adverse inferences from the invocation of the Fifth Amendment in a civil proceeding. Keating, 45 F.3d at 326 (citing Baxter v. Palmigiano, 425 U.S. 308, 318, 96 S.Ct. 1551, 47 L.Ed.2d 810 (1976)). The defendants assertion of a Fifth Amendment privilege in civil asset freeze litigation may therefore result in the courts drawing adverse inferences against the defendant and, based on such inferences, declining to modify the asset freeze order. See, e.g., SEC v. Schiffer, 1998 WL 30375, at *7 (S.D.N.Y. 1998) (after defendant asserted Fifth Amendment privilege and refused to provide information, court concluded that I have no alternative but to assume all of Schiffers accounts and funds are of a suspect nature. Thus, not only do I continue the asset freeze order, I also limit the release of funds authorized under the order to meet Schiffers living expenses to those necessary to maintain assets subject to ultimate liquidation and disgorgement, and to attorneys fees only as substantiated by this courts careful monitoring).
/// /// /// Criminal Liability That May Result from Misconduct during Asset Freeze Litigation Criminal Contempt 18 U.S.C. 401(3) authorizes a court to punish by fine or imprisonment any [d]isobedience or resistance to its lawful writ, process, order, rule, decree, or command. Fraudulently Transferring Property Cal. Penal Code 531 provides criminal penalties for a person who transfers property with actual intent to defraud or hinder creditors. Section 531 applies, among other things, to every person who is a party to any . . . contract or conveyance, had, made, or contrived with intent to deceive and defraud others, or to defeat, hinder, or delay creditors or others of their just debts, damages, or demands . . . . Transporting Stolen Property 18 U.S.C. 2314 provides criminal penalties for a person who knowingly transports in interstate commerce stolen property or money, or property or money obtained by means of a scheme to defraud. Perjury 18 U.S.C. 1621-23 provides criminal penalties for a person who commits or suborns perjury. Fraudulently Concealing Property from an Officer of the Court 18 U.S.C. 152(1) provides criminal penalties for a person who knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with control or custody of property, or, in connection with a case under title 11, from creditors or
the United States Trustee, any property belonging to the estate of a debtor . . . . Fraudulently Withholding Property from an Officer of the Court after Filing of Bankruptcy Case 18 U.S.C. 152(9) provides criminal penalties for a person who after the filing of a case under title 11, knowingly and fraudulently withholds from a custodian, trustee, marshal, or other officer of the court or a United States Trustee entitled to its possession, any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor . . . . Fraudulently Transferring Property in Contemplation of or During Bankruptcy Case 18 U.S.C. 152(7) provides criminal penalties for a person who in a personal capacity or as agent or officer of any person or corporation, in contemplation of a case under title 11 by or against the person or any other person or corporation, or with intent to defeat the provisions of title 11, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation. Impact on Sentencing of Conduct during Asset Freeze Litigation Acceptance of Responsibility Section 3E1.1(a) of the U.S. Sentencing Guidelines provides: If the defendant clearly demonstrates acceptance of responsibility for his offense, decrease the offense level by 2 levels. The commentary to this Guideline states in part: a defendant who falsely denies, or frivolously contests, relevant conduct that the court determines to be true has
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acted in a manner inconsistent with acceptance with responsibility. The commentary to this Guideline further provides that, in determining whether a defendant qualifies under subsection (a), appropriate considerations include, but are not limited to, the following: . . . (b) voluntary termination or withdrawal from criminal conduct or associations; (c) voluntary payment of restitution prior to adjudication of guilt; . . . (e) voluntary assistance to authorities in the recovery of the fruits and instrumentalities of the offense; (f) voluntary resignation from the office or position held during the commission of the offense . . . . Substantial Assistance to Authorities Section 5K1.1 of the U.S. Sentencing Guidelines provide that Upon motion of the government stating that the defendant has provided substantial assistance in the investigation or prosecution of another person who has committed an offense, the court may depart from the guidelines . . . . Note 2 of the Commentary to Section 5K1.1 states: The sentencing reduction for assistance to authorities shall be considered independently of any reduction for acceptance of responsibility. Substantial assistance is directed to the investigation and prosecution of criminal activities by persons other than the defendant, while acceptance of responsibility is directed to the defendants affirmative recognition of responsibility for his own conduct. Parallel Civil Proceedings A defendant in asset freeze litigation may have transferred its assets to third parties in foreign jurisdictions. The plaintiff may have difficulty establishing jurisdiction of those third parties and may decide
to initiate parallel asset freeze litigation in the jurisdictions where those third parties are located. Foreign jurisdictions, including the United Kingdom, grant asset freeze orders. See, e.g., Mareva, 2 Lloyds Rep. 509 ([i]f it appears that 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 the Court has jurisdiction in a proper case to grant an interlocutory judgment so as to prevent him [sic] disposing of those assets). A plaintiff may (or may have to) file a parallel proceedings in multiple jurisdictions to freeze assets held there. National Union Fire Insurance Co. of Pittsburgh, P.A. v. Kozeny, 115 F.Supp.2d 1243, 1245 (D. Col. 2000) (describing how plaintiffs obtained asset freeze orders in England, United States, and Bahamas, and noting that Because the London freezing order is not enforceable outside the jurisdiction of the London Court until it is enforced by a court in the relevant country, the London Court permitted this case to brought in Colorado to freeze defendants assets located here). BANKRUPTCY ISSUES IN ASSET FREEZE ORDER LITIGATION Power of District Court to Prevent Bankruptcy Filing There is some authority for the proposition that a federal court may issue either an injunction or a receivership order that prevents a defendant from filing bankruptcy. See, e.g., United States v. Royal Business Funds Corp., 724 F.2d 12 (2d Cir. 1983) (although the general rule is that a debtor may not agree to waive the right to file a bankruptcy petition and that a receivership does not preclude a bankruptcy filing by the debtor, [n]evertheless, a debtor subject to a federal receivership has no absolute right to file a bankruptcy petition . . . .); United States v. Vulpis, 961 F.2d 368, 370-72 (2d Cir. 1992) (affirming order barring president of corporation from filing bankruptcy
petition on behalf of corporation); CFTC v. FITC, Inc., 52 B.R. 935, 936 (N.D. Cal. 1985) (court ordered president of corporation in receivership to withdraw bankruptcy petition that president filed for corporation after the court appointed a receiver; court stated: it was the receiver, and only the receiver, who this Court empowered with the authority to place FITC in bankruptcy); SEC v. Sterns, 1991 WL 204901, at *1 (C.D. Cal. 1991) (court directed defendants in asset freeze litigation to withdraw bankruptcy petitions; court stated: It is within the broad equitable powers of a district court to preclude petitions in bankruptcy where there are compelling circumstances); see also Someone Claiming to Represent Oil & Gas Company v. Duryee, 9 F.3d 771, 773 (9th Cir. 1993) (appointment of state court receiver for company ousted management and precluded it from filing bankruptcy petition on behalf of company). On the other hand, there is also contrary authority. In re Milestone Educational Institute, Inc., 167 B.R. 716, 720 (Bankr. D. Mass. 1994) (. . . the appointment of receivers does not deprive the corporate directors of the power to file a bankruptcy petition); Paula Whitney Best, Corporate Receiverships and Chapter 11 Reorganizations, 10 Cardozo L. Rev. 285 (1988) (Does not the receivership imply that management has been fired? Not always; numerous courts have held that a dispossessed management does indeed have the right to file a bankruptcy petition). Further, 11 U.S.C. 543(d) provides that, unless otherwise ordered by the bankruptcy court, a receiver is to turn over all property of the debtor to the trustee. Further, at least where the receiver is appointed by a state court, [i]t is up to the bankruptcy court to decide, in its discretion, whether the receiver should be excused from turning over the assets of the bankruptcy estate, under standards of federal law set forth in 543. State Street Bank and Trust Co. v. Park (In re Si Yeon Park, Ltd.), 198 B.R. 956, 963 (Bankr. C.D. Cal. 1996)
Power of Federal Court to Withdraw Reference Even if the federal district court cannot prohibit the bankruptcy filing, the federal district court that granted the asset freeze order against the debtor may take control of the debtors bankruptcy case after it is filed, provided that the debtor files bankruptcy in the same district. This may be accomplished by withdrawing the reference of all or a portion of the debtors bankruptcy case pursuant to 28 U.S.C. 157(d) (The district court may withdraw, in whole or in part, any case or proceeding . . . .). See, e.g., FTC v. American Institute for Research and Development, 219 B.R. 639, 647-48 (D. Mass. 1998) (district court withdrew reference and dismissed bankruptcy cases to prevent bankruptcy filings from disrupting prior enforcement proceeding filed by FTC). The Automatic Stay 11 U.S.C. 362 Scope of Automatic Stay 362(a)-(b) In General The filing of a voluntary or involuntary petition under the Bankruptcy Code will result in an automatic stay, which is a form of statutory injunction against creditors and others from taking action against the debtor and the debtors property. The automatic stay is automatic in the sense that it occurs without any supporting evidence or judicial ruling. Instead, the automatic stay takes effect when a debtor files a voluntary bankruptcy petition under 11 U.S.C. 301. The automatic stay also takes effect when creditors of the debtor file an involuntary petition against the debtor under 11 U.S.C. 303. The filing of an unjustified involuntary bankruptcy petition may result in liability for attorneys fees and punitive damages under 11 U.S.C. 303(i). Under 11 U.S.C. 362(a), the filing of an voluntary petition under 11 U.S.C. 301 or an involuntary petition under 11 U.S.C. 303 operates
as an automatic stay, except as provided in 362(b). Among other things, 362(a)(1) provides: (a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of (1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; . . . (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; . . . (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title . . . . The exceptions to the automatic stay are set forth in 11 U.S.C. 362(b). Among other things, 362(b) states that the automatic stay does not stay the commencement or continuation of a criminal action or proceeding against the debtor . . . . 11 U.S.C. 362(b)(1). In addition, 362(b)(4) provides a limited exception from the automatic stay for the commencement or continuation of an action or proceeding by a government unit . . . to enforce such government units . . . police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the government unit to enforce such governmental units . . . police or regulatory power . . . . 11 U.S.C. 362(b)(4).
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However, 362(b)(4) by its terms creates exceptions to the automatic stay of 362(a)(1)-(3) and (6), not 362(a)(4)-(5), which stay any act to create, perfect, or enforce any lien against the bankruptcy estate or to create, perfect, or enforce any lien against property of the debtor to the extent such lien secures a claim that arose before the commencement of the bankruptcy case. Further, the police and regulatory power exception in 362(b)(4) by its terms does not apply to a proceeding for enforcement of a . . . money judgment. See, e.g., SEC v. Brennan, 230 F.3d 65, 69-76 (2d Cir. 2000) (police and regulatory power exception in 11 U.S.C. 362(b)(4) did not apply to proceeding by SEC to enforce order directing repatriation of offshore assets for the purpose of satisfying a money judgment requiring disgorgement of $75 million); see also CFTC v. Co Petro Marketing Group, Inc., supra, 700 F.2d at 1284 (automatic stay did not stay proceeding to require law firm to disgorge $60,000 to receiver pursuant to pre-bankruptcy asset freeze order; The district courts order in this case is not the enforcement of a money judgment; rather, it is the enforcement of the district courts injunction against transferring or dealing in Co Petro assets; moreover, no preference would result since the receiver must turn over all assets of Co Petro, including the $60,000, to the bankruptcy trustee for distribution with the rest of the estate). Contempt Proceedings The automatic stay of 11 U.S.C. 362 may or may not stay a contempt proceeding against the debtor for violating an order issued prior to the debtors bankruptcy filing. Courts have disagreed on the proper resolution of this issue. Compare Goichman v. Bloom (In re Bloom), 875 F.2d 224, 226 (9th Cir. 1989) (creditor violated the automatic stay if he filed contempt motion to enforce pre-petition decree with the purpose of securing assets protected by the stay or
harassing [the debtor] . . . .); Dumas v. Atwood (In re Dumas), 19 B.R. 676, 678 (B.A.P. 9th Cir. 1982) (We conclude, on the authority of Hooker, that the state courts sentence for contempt after bankruptcy for disobeyance of the subpoena before bankruptcy was not affected by the automatic stay of 11 U.S.C. 362 . . . .) (citing David v. Hooker, Ltd., 560 F.2d 412 (9th Cir. 1977) (decided under the Bankruptcy Act 1898)) with Atkins v. Martinez (In re Atkins), 176 B.R. 998 (Bankr. D. Minn. 1994) (stating that In re Dumas, supra, and David v. Hooker, Ltd., supra, are not well-founded).. A criminal contempt proceeding may be exempt from the automatic stay under 11 U.S.C. 362(b)(1), which exempts from the stay the commencement or continuation of a criminal action or proceeding against the debtor. However, 11 U.S.C. 362(b) does not contain an express statutory exception for civil contempt proceedings. See In re Atkins, supra, 176 B.R. at 1006 (stating that 11 U.S.C. 362(b) (1) would afford an exception from the automatic stay but only for formal proceedings for criminal contempt). In dealing with the issue of whether a contempt proceeding is exempt from the automatic stay, courts have focused on a variety of factors, including: (1) whether the contempt proceeding fits within one of the statutory exceptions to the stay expressly delineated in 11 U.S.C. 362(b); (2) whether the contempt proceeding is for the purpose of vindicating the dignity of the court whose order was violated; and (3) whether purpose of the contempt proceeding is to harass or collect money from the debtor. See, e.g., SEC v. Kenton Capital, Ltd., 983 F.Supp. 13, 14-15 (S.D.N.Y. 1997) (This Court has concluded that this contempt proceeding is not automatically stayed by the bankruptcy petition for two reasons: 1) the Court is conducting this proceeding to uphold the dignity of the Court and to vindicate the authority of the
Court to enforce its orders, and 2) the applicability of 11 U.S.C. 362(b) (4) & (5) as it relates to income and asset identification and an accounting, and not the enforcement of the judgment); Dock C-Food Ltd. v. Cherry (In re Cherry), 78 B.R. 65, 70 (Bankr. E.D. Pa. 1987) (Given our belief that the automatic stay is extremely powerful, and allows few exceptions, it is easy to understand why we are reluctant to accept the reasoning of those cases which hold, with no apparent Code referrent, that even civil, as opposed to criminal, see 11 U.S.C. 362(b) (1), contempt powers of courts other than the bankruptcy court are somehow exempt from the stay); International Distribution Centers, Inc. v. Walsh, 62 B.R. 723, 729 (S.D.N.Y. 1986) (dicta that automatic stay did not apply because: the Court finds that regardless of the source of the contempt motion, the instant request is one designed to uphold an order of this Court, and is not one calculated to enforce a money judgment, or to harass a defendant. Consequently, 362 does not enjoin the Court from proceeding to enforce its order issued on August 20, 1994, a full ten months prior to the date upon which defendants filed in Chapter 11). Modification of Automatic Stay 362(d) Under 11 U.S.C. 362(d), the bankruptcy court may terminate, annul, or modify the automatic stay. Grounds for relief from stay include for cause, including lack of adequate protection of an interest in property of the party requesting relief from the stay. Because 362(d) permits modification of the automatic stay, a defendants bankruptcy filing may only delay, not stop, asset freeze litigation. See, e.g., FDIC v. Garner, supra, 125 F.3d at 1276 (in response to asset freeze litigation filed by FDIC, the defendants filed bankruptcy; shortly thereafter, the district court issued an order appointing a trustee in the bankruptcy proceeding and modified the Chapter 11 automatic stay to
permit [the defendants to appeal] and to allow the FDIC to proceed with its underlying district court action against the Garners and others). Because the bankruptcy court can modify the automatic stay, a debtor may not violate a pre-petition court order with impunity, even if 11 U.S.C. 362(a) operates to stay contempt proceedings. For example, in Dock C-Food Ltd. v. Cherry, supra, 78 B.R. 65, the bankruptcy court found that the automatic stay applied to a civil contempt proceeding, but the bankruptcy court modified the stay to permit the claimant to pursue prospective injunctive relief against the debtor to remedy the allegedly illegal post-petition conduct of the debtor. Id., at 74. See also Rudaw/Empirical Software Products Ltd. v. Elgar Electronics Corp. (In re Rudaw/Empirical Software Products Ltd.), 83 B.R. 241, 247 (Bankr. S.D.N.Y. 1988) (court modified stay to permit claimant for the purpose of initiating contempt proceedings against the debtor and its officers for the alleged violation of the California Superior Courts preliminary injunction order dated June 23, 1987"). The Price of the Automatic Stay Bankruptcy Restrictions If a debtor files a voluntary bankruptcy petition, then the debtor must disclose its assets in sworn bankruptcy schedules filed 15 days after the bankruptcy petition or within such additional time period as the bankruptcy court allows. See Fed.R.Bankr.P. 1007(b)-(c). In an involuntary bankruptcy case, the debtor must file sworn schedules within 15 days of the order for relief (i.e., the bankruptcy courts determination that the involuntary bankruptcy petition was justified under 11 U.S.C. 303), or within such additional time period after the order for relief as the bankruptcy court may allow. ///
53.
The commencement of a bankruptcy case creates a bankruptcy estate under 11 U.S.C. 541(a). The bankruptcy estate consists of substantially all non-exempt property that the debtor owned as of the filing of the bankruptcy petition. The Bankruptcy Code limits and restricts a debtors ability to use property of the bankruptcy estate. For example, under 11 U.S.C. 701, a trustee will be appointed if the debtor files a chapter 7 (liquidation) bankruptcy case; and, under 11 U.S.C. 1104, a trustee may be appointed for cause or in the interest of creditors if the debtor files a chapter 11 (reorganization) bankruptcy case. In addition, under 11 U.S.C. 363(b)(1), property of the bankruptcy estate may not be used, sold or leased outside the ordinary course of business except after notice and a hearing. Because the Bankruptcy Code, if strictly enforced, places substantial restrictions on a debtor, the debtors bankruptcy filing may lessen the need for an asset freeze order against the debtor. See, e.g., FTC v. Evans Products Co., supra, 775 F.2d at 1089 (The potential for irreparable harm in this case is limited. We find no evidence that Evans is, or is likely to, secret[e] away assets before relief can be effectuated. Moreover, Evans status as a debtor in Chapter 11 limits its ability to transfer assets to the disadvantage of potential judgment creditors). In the event that a corporate defendant files bankruptcy and a bankruptcy trustee is appointed, the trustee will have the right to control the attorney-client privilege of the corporation. CFTC v. Weintraub, 471 U.S. 343, 105 S.Ct. 1986, 85 L.Ed.2d 372 (1985). Denial of Discharge 11 U.S.C. 727 A defendant in asset freeze litigation may be tempted to conceal assets, destroy records, or submit false testimony. This kind of misconduct, in addition to having criminal consequences, will also
54.
prevent or impair the defendants ability to obtain a discharge in bankruptcy. 11 U.S.C. 727(a)(2) 11 U.S.C. 727(a)(2) provides that the court shall grant the debtor a discharge, unless the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed or has permitted to be transferred, removed, destroyed, mutilated, or concealed property of the debtor within one year before the date of the filing of the petition or property of estate after the filing of the petition. 11 U.S.C. 727(a)(3) 11 U.S.C. 727(a)(3) provides that the court shall grant the debtor a discharge, unless the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information . . . , from which the debtors financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case . . . . 11 U.S.C. 727(a)(5) 11 U.S.C. 727(a)(5) provides that the court shall grant the debtor a discharge, unless . . . the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtors liabilities . . . . APPOINTMENT OF A RECEIVER Inherent Power of Federal Court to Appoint Receiver as Ancillary Equitable Remedy A receiver may be appointed by a federal court to provide relief ancillary to effective final equitable relief. SEC v. Wencke, 622 F.2d
1363, 1369 (9th Cir. 1980) (The power of a district court to impose a receivership or grant other forms of ancillary relief does not in the first instance depend on a statutory grant of power from the securities laws. Rather, the authority derives from the inherent power a court of equity to fashion effective relief) (footnotes and citations omitted); Pioche Mines Consolidated, Inc. v. Dolman, 333 F.2d 257, 272 (9th Cir. 1964) (Receivership is an ancillary remedy, and the substantive relief here sought does not justify its use. . . . A receivership is not an end in itself; it is but a means to an end), cert. denied, 380 U.S. 956, 85 S.Ct. 1082, 13 L.Ed.2d 972 (1965). 1. E.g., SEC v. American Board of Trade, Inc., 830 F.2d 431, 436 (2d Cir. 1987) (Although neither the Securities Act of 1933 nor the Securities Exchange Act of 1934 explicitly vests district courts with the power to appoint trustees or receivers, courts have consistently held that such power exists . . . where necessary to prevent the dissipation of a defendants assets pending further action by the court) (citations omitted). 2. E.g., although RICO does not expressly authorize the prejudgment appointment of a receiver in a civil action, in United States v. Ianello, 824 F.2d 203, 207 (2d Cir. 1987), the circuit court affirmed the appointment of the receiver to manage a restaurant in an action by the United States for injunctive relief under 18 U.S.C. 1964(a) and (b). In Ianello, the Second Circuit stated: Defendants attack on the breadth of the receivership need not detain us long. In 18 U.S.C. 1964, [C]ongress empowered district courts to prevent * * * violations of section 1962 by issuing appropriate orders, * * * ordering dissolution or
reorganization of any enterprise * * *, 1964(a), and to enter such restraining orders or prohibitions, or take such other act * * * as it shall deem proper, 1964(b). Under these sections, the district court has considerable discretion to frame the scope of a receivership to meet the needs of the case. 824 F.2d at 208 (ellipses in original)). A receiver is an extraordinary equitable remedy that is only justified in extreme situations. Although there is no precise formula for determining when a receiver may be appointed, factors typically warranting appointment are a valid claim by the party seeking appointment; the probability that fraudulent conduct has occurred or will occur to frustrate that claim; imminent danger that property will be concealed, lost, or diminished in value; inadequacy of legal remedies; lack of a less drastic equitable remedy; and likelihood that appointing the receiver will do more good than harm. Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316-17 (8th Cir. 1993) (affirming order appointing receiver). /// /// Statutory Power of Federal Court to Appoint Receiver In addition to the inherent power of federal courts to appoint receivers as an ancillary equitable remedy, various statutes expressly authorize the appointment of receivers in asset freeze litigation. The following are several examples. Federal Debt Collection Procedures Act The Federal Debt Collection Procedures Act, 28 U.S.C. 3001 et seq., expressly authorizes the appointment of a receiver as a provisional remedy in a civil action by the United States to collect a debt. Section 3103 of title 28 provides in relevant part:
(a) Appointment of a receiver. If the requirements of section 3101 are satisfied, a court may appoint a receiver for property in which the debtor has a substantial nonexempt interest if the United States shows reasonable cause to believe that there is a substantial danger that the property will be removed from the jurisdiction of the court, lost, concealed, materially injured or damaged, or mismanaged. 28 U.S.C. 3103(b)-(g) specify the powers and duties of a receiver appointed pursuant to 28 U.S.C. 3103(a). The powers include the power to manage the property subject to the receivership. Id., 3103(b). The duties include the duty to keep accounting records and to file reports at regular intervals as directed by the court. Id., 3103(d). 18 U.S.C. 1345 In a civil action by the Attorney General to enjoin transfers of property traceable to certain crimes, including banking law violations, 18 U.S.C. 1345(a)(2)(B)(ii) authorizes the Attorney General to seek the appointment of temporary receiver to administer property restrained by the court. 18 U.S.C. 983(j) 18 U.S.C. 983(j), enacted as part of the Civil Asset Forfeiture Reform Act, expressly authorizes federal courts to create receiverships, appoint conservators, custodians, appraisers, accountants, or trustees for the purpose of securing, maintaining, or preserving the availability of property subject to forfeiture. /// Fed.R.Civ.P. 64 and the Uniform Fraudulent Transfer Act Federal courts have authority under Fed.R.Civ.P. 64 to grant provisional remedies authorized by state law. Section 3439.07 of the
UFTA authorizes the appointment of a receiver as a provisional remedy in action to set aside a fraudulent transfer. Cal. Civ. Code 3439.07. Broad Discretion of Federal Court to Supervise Receivership [A] district courts power to supervise an equity receivership and to determine the appropriate action to be taken in the administration of the receivership is extremely broad. SEC v. Hardy, 803 F.2d 1034, 1037 (9th Cir. 1986). Some statutes authorizing the appointment of a receiver, such as 28 U.S.C. 3103, provide specific guidance as to rules governing the administration of the administration of the receivership. Other statutes providing for the appointment of a receiver, such as 18 U.S.C. 1345, provide little guidance. Fed.R.Civ.P. 66, as supplemented by Local Civil Rule 25, provides additional guidance. Rule 66 states in relevant part: . . . The practice in the administration of estates by receivers or by other similar officers appointed by the court shall be in accordance with the practice heretofore followed in the courts of the United States or as provided in rules promulgated by the district courts. In all other respects the action in which the appointment of a receiver is sought or which is brought by or against a receiver is governed by there rules. Local Civil Rule 25 generally requires the receiver to keep records and to give notice to parties and creditors. In addition, Local Rule 25.8 states: Except as otherwise ordered by the Court, a receiver shall administer the estate as nearly as possible in accordance with practice in the administration of estates in bankruptcy. The Bankruptcy Code (title 11) and the Federal Rules of Bankruptcy Procedure contain detailed rules on the administration of bankruptcy estates. Receivership and Bankruptcy
The reference to bankruptcy in Local Civil Rule 25.8, quoted above, is a reminder that receiverships are analogous to bankruptcy cases. The Ninth Circuit has cautioned that a receivership involved in a liquidation should not be used as a substitute for a bankruptcy case. There are sound policy reasons for allowing liquidation to take place only in a court of bankruptcy. SEC v. Lincoln Thrift Association, 577 F.2d 600, 605 (9th Cir. 1978). Among other things, bankruptcy law provides for notices to creditors and an established system for equitable distribution of the assets to creditors. Id., at 605-06 (footnote and citations omitted); SEC v. American Board of Trade, Inc., supra, 830 F.2d at 437 (we stated that receiverships ancillary to SEC actions against brokers or broker-dealers should not be continued, in a case involving insolvency, beyond the point necessary to get the estate into the proper forum for liquidation the bankruptcy court) (quotations and citations omitted). Nevertheless, it is a recognized principle of law that the district court has broad powers and wide discretion to determine the appropriate relief in an equity receivership. Lincoln Thrift, supra, 577 F.2d at 606. In Lincoln Thrift, the Ninth Circuit concluded that the district court did not abuse its discretion in refusing to transfer the liquidating receivership proceeding to bankruptcy court. The Ninth Circuit noted the district courts intimate knowledge of the factual data relevant to liquidation, the receivers expertise, and the fact that an initial distribution of $4.6 million had already been made by the receiver. Id., at 609. A litigant may prefer receivership to bankruptcy precisely because receivership law does not have the same rigidity as bankruptcy law, which is largely defined by the Bankruptcy Code and the Federal Rules of Bankruptcy Code. For example, the Bankruptcy Code includes statutory priorities for distribution of assets to creditors. See 11 U.S.C.
507, 510, 726. By reason of the lack of statutorily defined priorities in a receivership, a creditor who might have a subordinated or disallowed claim in bankruptcy may prefer to have the debtors assets administered outside bankruptcy. Similarly, a government enforcement agency may believe that the Bankruptcy Code fails to accord an adequate priority to the statutory interests protected by the government agency. In the event that a corporation subject to a receivership files bankruptcy, the receiver has a duty to turn over the receivership assets to the trustee or debtor-in-possession under 11 U.S.C. 543(b). However, 11 U.S.C. 543(d) gives the bankruptcy court discretion to leave the receiver in control of the receivership assets if the interests of creditors and, if the debtor is not insolvent, of equity security holders would be better served by permitting a custodian [i.e., a receiver] to continue in possession, custody, or control of such property . . . . In addition, there is some authority for the proposition that the appointment of a receiver for a corporation prevents corporate management from filing bankruptcy on behalf of the corporation. See Part IV, above; see also CFTC v. FITC, Inc., supra, 52 B.R. 935, 938 (The action of Rubenstrunk in filing a petition in bankruptcy without the consent of the Court and its receiver directly contravenes this Courts Orders . . . . [] The Court, therefore, orders defendant Rubenstrunk to withdraw the bankruptcy In Re FITC BK-LV 85-258 (Chapter 11), within 48 hours of notice of this Order). Power of Receiver to File Litigation 28 U.S.C. 754 states that a receiver, upon giving bond as required by the court in any civil proceeding involving property, shall be vested with complete jurisdiction and control of all such property with the right to take possession thereof, and shall have capacity to
sue in any district without ancillary appointment, and may be sued with respect thereto as provided in section 959 of this title. Federal receivers are empowered pursuant to 28 U.S.C. 754 to collect assets anywhere in the United States. Select Creations, Inc. v. Paliafito, supra, 852 F.Supp. at 780. Section 754 requires the receiver, within ten days of its appointment, to file copies of the complaint and order of appointment in each district in which receivership property is located. In addition, a federal receiver may sue in the court of its appointment through an ancillary proceeding to accomplish the ends sought and directed by the suit in which the appointment was made. Tcherepnin v. Franz, 439 F.Supp. 1340, 1343-44 (N.D. Ill. 1977) (quoting Pope v. Louisville, New Albany & Chicago Ry. Co., 173 U.S. 573, 577, 19 S.Ct. 500, 43 L.Ed. 814 (1899)). A receiver of a corporation has the power to sue to set aside fraudulent transfers made by the corporation. Scholes v. Lehmann, 56 F.3d 750, 755 (7th Cir. 1995) (Now that the corporations created and initially controlled by Douglas are controlled by a receiver whose only object is to maximize the value of the corporations for the benefit of their investors and any creditors, we cannot see an objection to the receivers bringing suit to recover corporate assets unlawfully dissipated by Douglas), cert. denied, 516 U.S. 1028, 116 S.Ct. 673, 133 L.Ed.2d 522 (1995). It is less clear whether the receiver of the assets of an individual can seek to recover fraudulent transfers made by the individual. Scholes, supra, 56 F.3d at 755 ([W]e can find no cases in which a receiver for a sole proprietorship recovered a fraudulent conveyance). Equitable defenses such as unclean hands that would apply to the entity in receivership may not apply to the receiver. FDIC v. OMelveny & Myers, 61 F.3d 17, 19 (9th Cir. 1995) (. . . defenses
based on a partys unclean hands or inequitable conduct do not generally apply against that partys receiver). Control by Receiver of Attorney-Client Privilege The receiver of a corporation may be granted power to control the attorney-client privilege of a corporation. See CFTC v. Standard Forex, Inc., 882 F.Supp. 40, 44 (E.D.N.Y. 1995) (Accordingly, in the absence of any individual asserting the right to control Standard Forex or its successor entity, there is no prejudice that would ensue by granting to the Receiver the right to control the companys attorney-client privilege); see also CFTC v. Weintraub, supra, 471 U.S. 343 (bankruptcy trustee controls attorney-client privilege of corporate debtor). Protection of the Receiver from Litigation 28 U.S.C. 959(a) provides that receivers may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on the business connected with such property. Under 959(a), a receiver may be sued without leave of court only based on acts or transactions that consist of carrying on the business connected with the property. Further, 959(a) states: Such actions shall be subject to the general equity power of such court so far as the same may be necessary to the ends of justice, but this shall not deprive a litigant of his right to trial by jury. As described below, receivers are often immune from suit, and receivership courts have the power to issue blanket stays to protect the receiver from litigation. /// Because receivers are entitled to protection against unnecessary and oppressive litigation, consent to sue [under 28 U.S.C. 959] will not be granted where the receiver has kept clearly within the scope of his authority and acted wholly under the direction of the court. FDIC v.
J.D.L. Associates, 866 F.Supp. 76, 78-79 (D. Conn. 1994) (quoting Connecticut state precedent). In many instances a court-appointed receiver has derivative judicial immunity. See New Alaska Development Corp. v. Guetschow, 869 F.2d 1298, 1303 (9th Cir. 1989) (Absent broad immunity, receivers would be a lightning rod for harassing litigation aimed at judicial orders) (quotations and citation omitted); Pioche Mines Consolidated, Inc. v. Dolman, supra, 333 F.2d at 276 (The receiver is not personally liable for acts done by him within the scope of the authority conferred upon him by the court) see also Bennett v. Williams, 892 F.2d 822 (9th Cir. 1989) (discussion of derived judicial immunity of bankruptcy trustee). In a receivership, a federal court has the power to issue a blanket stay, effective against all persons, to prevent interference with the receivership. The power of the district court to issue a stay, effective against all persons, of all proceedings against the receivership entities rests as much on its control over the property placed in receivership as on its jurisdiction over the parties to the securities fraud action. SEC v. Wencke, supra, 622 F.2d at 1369; see SEC v. Credit Bancorp, Ltd., 93 F.Supp.2d 475, 477 (S.D.N.Y. 200) (Moreover, where a court has appointed a receiver and obtained jurisdiction over the receivership estate, as here, the power to stay competing actions falls within the courts inherent power to prevent interference with the administration of that estate). The federal courts power to issue a stay to protect the receivership is not unlimited. See, e.g., SEC v. Black, 163 F.3d 188, 196 (3rd Cir. 1998). In SEC v. Black, supra, the circuit court explained that the district court correctly vacated an ex parte freeze order as to three accounts in a receivership case:
The SEC argues in its brief that the District Court had the authority to impose and to continue the asset freeze order over the A, B and D accounts pursuant to Federal Rule of Civil Procedure 66 since the freeze was part of an ongoing receivership proceeding governed by the jurisdictional provisions of the federal securities laws. 15 U.S.C. 77v(a), 78aa, 80b-14. However, the case law cited by the SEC actually supports the District Courts determination that the freeze as to these funds was improper because in no case referenced by the SEC has it been granted a freeze ex parte of assets where those assets were anything other than property, or deemed property, of a defendant or of a culpable third party. 163 F.3d at 196. A defendant who disobeys a courts receivership orders risks contempt sanctions. See, e.g., SEC v. Credit Bancorp, Ltd., supra, 2000 WL 968010, at *6-*19 (court imposed contempt sanctions on defendant who disobeyed order to turn over property to receiver). Duty of Receiver to Comply with State Law Under 28 U.S.C. 959(b), a receiver appointed in any cause pending in any court of the United States . . . shall manage and operate property in his possession as such . . . receiver . . . according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof. Duty of Receiver to Account In effecting the final discharge of the receiver, the court must have a full accounting by him, upon notice and hearing. Pioche Mines Consolidated, Inc. v. Dolman, supra, 333 F.2d at 276. Claimants and Distribution of Receivership Assets
65.
Non-parties to the litigation that result in the appointment of the receiver may have claims to property held or recovered by the receiver. To participate fully in the receivership, the non-party may need to obtain leave to intervene under Fed.R.Civ.P. 24. SEC v. Credit Bancorp, Ltd., 194 F.R.D. 457 (S.D.N.Y. 2000) (granting permissive intervention under Fed.R.Civ.P. 24(b)). It is typical in cases involving a receivership imposed on a corporate defrauder that the resources of the receivership estate are insufficient to allow all the victims of the fraud to recoup their losses, as is the situation here. SEC v. Credit Bancorp, Ltd., 2000 WL 1752979, at *14 (S.D.N.Y. 2000) (approving proposed distribution of receivership assets). [F]ederal courts overseeing equity receiverships imposed on a defrauders estate have taken different approaches as to whether to approve the return of assets through tracing. Id. (citations omitted). [W]hile a court sitting in equity may allow tracing, there is no entitlement on the part of a defrauded customer to that measure as it may frustrate equity. Id. (quotations and citation omitted). See United States v. Real Property Located at 13328 and 13324 State Highway 75 North, Blaine County, Idaho, 89 F.3d 551, 553 (9th Cir. 1996) (funds administered by SEC for victims of fraud would be divided pro rata and creditor would not be permitted to apply tracing). Assessment of Receivership Costs In a corporate receivership, the court has discretion in assessing whether and to what extent the corporation must bear the cost of the receivership. United States v. Ianello, supra, 824 F.2d at 209 (in RICO receivership, United States would initially bear costs of receivership pending resolution of lawsuit; however, [i]f it is established that Umbertos as a corporate entity has benefitted from the receivership, it might then be appropriate to reimburse the government for some, or
perhaps all, of the expenses of the receiver); CFTC v. Frankwell Bullion, Ltd., 99 F.3d 299, 306 (9th Cir. 1996) (after CFTC improperly obtained appointment of temporary receiver, the district court did not abuse its discretion in allocating seventy-five percent of the receivership costs to the CFTC); Pioche Mines Consolidated, Inc. v. Dolman, supra, 333 F.2d at 276 (where party wrongfully obtained appointment of receiver, [t]he court has a discretion to charge the receivers expenses either to the corporation or to the party who wrongfully obtained the receivers appointment). Appeal of Receivership Orders Under 28 U.S.C. 1292(a)(2), the following orders are subject to interlocutory appeal: Interlocutory orders appointing receivers, or refusing orders to wind up receiverships or to take steps to accomplish the purposes thereof, such as directing sales or other disposals of property. Under Fed.R.Civ.P. 62(a), an appeal from such an order does not operate as a stay, but Rule 62(a) does not preclude the appellant from seeking a stay pending appeal. See Fed.R.Civ.P. 62(g). ASSET FORFEITURE ISSUES Civil Asset Forfeiture Reform Act The Civil Forfeiture Reform Act of 2000 (CAFRA or the Act)), Pub.L. No. 106-185, was signed on April 25, 2000 and became effective 120 days later, i.e., August 23, 2000. Codified in part at 18 U.S.C. 983 and 985, and amending 981, 984 and other statutes, CAFRA makes numerous procedural and substantive changes to civil, judicial and administrative forfeiture proceedings. This is the most sweeping reform of civil forfeiture law since the Comprehensive Crime Control Act of 1984. CAFRA also authorizes criminal forfeiture for any offense for which Congress has authorized civil forfeiture, thereby drastically expanding the scope of criminal forfeitures. 28 U.S.C. 2461(c).
However, the provisions of CAFRA (highlights of which follow) do not reform criminal forfeiture proceedings. Prior to CAFRAs enactment, the Supreme Court ruled that, without supporting exigent circumstances, the ex parte seizure of a residence in a civil asset forfeiture proceeding violates the Due Process Clause of the U.S. Constitution. United States v. James Daniel Good Real Property, 510 U.S. 43, 53, 114 S.Ct. 492, 126 L.Ed.2d 490 (1993). In finding unconstitutional the seizure in that case, the Court nevertheless commented that an ex parte restraining order would be appropriate in certain circumstances: If there is evidence, in a particular case, that an owner is likely to destroy his property when advised of the pending action, the Government may obtain an ex parte restraining order, or other appropriate relief, upon a proper showing in district court. See Fed.R.Civ.P. 65. 510 U.S. at 59. CAFRA Imposes Various Procedures and Deadlines for Government and Claimants In general, the government is given less time, and the claimant is given more time. 18 U.S.C. 983(a). Remember to examine all seizure notices carefully for choices between administrative and judicial forfeiture, and beware of deadlines and waivers. If delays still seem unduly prejudicial, consider the applicability of a motion to return property under Fed.R.Cr.P. 41(e). Such motions can be filed in the district court where the seizure warrant was issued or in the court of the district in which the property was seized. 18 U.S.C. 981(b)(3). CAFRA Switches the Burden of Proof CAFRA switches the burden of proof in civil forfeiture proceedings from the claimant to the government. 18 U.S.C. 983(c)(1). The
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government can meet its burden through the use of evidence gathered after the filing of the complaint. Id., 981(c)(2). Where the government seeks to forfeit property used to commit or facilitate a criminal offense (i.e., boats or cars used for narcotics trafficking), the government must show a substantial connection between the property and the offense. Id., 983(c)(3). This should prevent, e.g., forfeiture of houses based upon trivial or attenuated links to criminal activity. CAFRA Codifies the Innocent Owner Affirmative Defense CAFRA codifies the innocent owner affirmative defense for property interests held before or after the time of the conduct giving rise to the forfeiture. 18 U.S.C. 983(d). CAFRA Codifies Supreme Court Constitutional Law CAFRA codifies Supreme Court constitutional law by permitted a claimant to bear the burden of proving that the forefeiture is grossly disproportional to the gravity of the offense giving rise to the forfeiture. 18 U.S.C. 983(g). See United States v. Bajakajian, 524 U.S. 321, 118 S.Ct. 2028, 141 L.Ed.2d 314 (1998). CAFRA Changes the Statute of Limitations CAFRA changes the statute of limitations in 19 U.S.C. 1621 civil forfeiture can be commenced either two years after the governments discovery of the propertys involvement in the alleged offense, or five years after discovery of the offense, whichever is later. Time begins to run when the government is aware of facts that should trigger an investigation leading to the discovery of the propertys involvement in the offense. CAFRA Extends Reach of Forfeiture CAFRA extends the reach of forfeiture to proceeds of specified unlawful activity, as defined in 18 U.S.C. 1956(c)(7), i.e., the same
long list of offenses listed in the money laundering statute. Money laundering need not be proven the cross-reference is purely definitional. 18 U.S.C. 981(a)(1)(c). Proceeds is defined as property of any kind obtained as a result of the offense giving rise to forfeiture and property traceable thereto, and is not limited to net gain or profit. CAFRA Expands Forfeiture of Fungible Property CAFRA expands forfeiture of fungible property, (i.e., cash, funds on deposit, bearer instruments, precious metals, if forfeiture is commenced within one year from the date of the underlying offense), to all civil forfeitures, not just money laundering forfeitures. 18 U.S.C. 984. CAFRA Codifies Procedures for Forfeiting Real Property CAFRA codifies procedures for forfeiting real property. 18 U.S.C. 985. CAFRA Allows Recovery of Attorney Fees CAFRA allows recovery of legal fees for the claimant substantially prevailing and (unlike the Equal Access to Justice Act), CAFRA: 1) is not limited to cases where the governments position was without substantial justification, and 2) is not limited to the rate of $125 per hour. 28 U.S.C. 2465. (Alternatively, if the claimants claimed property interest is found frivolous after the government prevails, then the court can impose a fine between $250 and $5,000, separate from exposure under Fed.R.Civ.P. 11.) CAFRA Punishes as a Crime any Destruction, Transfer, or Disposal of Property CAFRA, by amending 18 U.S.C. 2232, punishes as a crime any destruction, transfer, or disposal of property (before, during or after any search for or seizure of property), if done for the purpose of preventing or impairing the Governments lawful authority to take such property into its custody or control or to continue holding such property. 18
U.S.C. 2232(a). In addition, 2232(b) punishes as a crime the destruction or transfer of property for the purpose of impairing or defeating a courts continuing in rem jurisdiction of property in a civil forfeiture proceeding. CAFRA Provides for Sanctions CAFRA provides for sanctions (up to and including dismissal of the claim) if the claimant in the forfeiture proceeding refuses to provide bank records located in a foreign country. 18 U.S.C. 986(d). Attorneys for holders of accounts in the Cayman Islands, Switzerland, and other bank secrecy havens, take note. CAFRA Reinstates Fugitive Disentitlement Doctrine CAFRA reinstates the fugitive disentitlement doctrine, allowing the court to reject claims by fugitives in civil forfeitures. 28 U.S.C. 2466. CAFRA Maintains Pre-Trial Restraining Orders CAFRA maintains pre-trial restraining order authority in criminal forfeitures to preserve the property. 21 U.S.C. 853(e). Assets of a business may be restrained to ensure their availability for restitution 18 U.S.C. 983(j). Section 983(j)(1) provides that, upon application of the United States, a federal court may enter a restraining order or injunction . . . or take any other action to seize secure, maintain, or preserve the availability of property subject to civil forfeiture. In addition, in limited circumstances, 18 U.S.C. 983(j)(3) authorizes an ex parte restraining order to be granted even before the United States files a civil forfeiture complaint: (3) A temporary restraining order under this subsection may be entered upon application of the United States without notice or opportunity for a hearing when a complaint has not yet been filed with respect to the property, if the United States demonstrates that there is probable cause to believe that the property with respect to which
the order is sought is subject to civil forfeiture and that provision of notice will jeopardize the availability of the property for forfeiture. Such a temporary order shall expire not more than 10 days after the date on which it is entered, unless extended for good cause shown . . . . Prior to the enactment of CAFRA, the Ninth Circuit ruled that a pretrial restraining order is a form of injunction subject to interlocutory appeal under 28 U.S.C. 1292(a)(1). United States v. Roth, supra, 912 F.2d at 1133 (The governments argument that a pre-trial order restraining assets is a non-appealable order ignores Croziers holding that such an order is a preliminary injunction for procedural purposes and therefore appealable as a preliminary injunction under 1292(a)(1)). L.L.G.
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Asset Freeze Litigation 7-11-06

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ASSET FREEZE ORDER LITIGATION IN FEDERAL COURT

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ASSET FREEZE ORDER LITIGATION IN FEDERAL COURT

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Fed.R.Civ.P. 62(g) states in relevant part: The

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