Let’s say your company has a corporate debtor that owes your company a sizable debt. You are concerned that the debtor is in poor financial condition, and that by the time a lawsuit commences and a judgment is obtained, the debtor will not have any assets available to satisfy the outstanding debt. You, therefore, want to try to place a restraint, known as a preliminary injunction on the debtor’s funds prior to obtaining a judgment. The main question is: Is this permitted under New York law?
A preliminary injunction is a provisional relief, placing a hold on a defendant’s asset when the defendant threatens or is about to act in violation of the plaintiff’s rights, which would render a judgment ineffectual, according to the New York Civil Rules. In order to obtain a preliminary injunction on a debtor’s accounts, a creditor has to show a:
- Likelihood of success on the merits in the underlying case
- Risk of irreparable harm that the debtor will dissipate its assets
- Balancing of equities in its favor
Filing a Preliminary Injunction
Preliminary injunctions are typically filed for suits over non-liquid assets such as real estate. A preliminary injunction differs from an order of attachment. An order of attachment is a procedural mechanism wherein, under certain circumstances, a plaintiff would be able to seize and preserve the defendant’s assets until the litigation is adjudicated. Usually, an order of attachment is granted if the defendant, with intent to defraud his creditors or frustrate the enforcement of a judgment, has assigned, disposed of, encumbered property, or removed it from the state.
Whether to grant a preliminary injunction lies within the sound discretion of the court after reviewing all of the applicant’s papers. The big question then is whether this can be done on a debtor’s assets when seeking a money judgment for an outstanding monetary debt.
The answer really turns on the second prong “a risk of irreparable harm that the debtor will dissipate its assets.” An “irreparable injury” is an injury for which monetary damages are insufficient. The injury must be direct and concrete. Courts will deny a motion where the moving party has an adequate remedy at law, such as money damages. Therefore, New York’s highest court has made it clear that preliminary injunctions are not available to unsecured creditors to restrain a debtor’s asset transfers during the pendency of an action for money damages. If your case is solely based on outstanding funds due, filing for a preliminary injunction is usually not available.
There are, however, two exceptions. One is if the case concerns a specific trust fund or investment fund, courts will find an irreparable injury because there is harm to the actual property, not to the value of the property. The other exception is if the relief is authorized by statute and is in the public interest, i.e. preventing fraud on public monies.
For most creditors that are seeking monetary damages from their debtor, seeking a preliminary injunction on the debtor’s funds most likely will not be granted because of the lack of irreparable harm in the eyes of the courts.
If you are trying to collect money from a debtor, contact Frank, Frank, Goldstein and Nager to learn more about your options. We have the experience that pays.
