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PRE-JUDGMENT INJUNCTION TO PREVENT DISSIPATION OF ASSETS

Obtaining a judgment is only a first step in process of a collecting a debt. After you get your judgment you have to collect it. Surprise surprise, not all judgment debtors (even those that can afford it) will voluntarily pay over the judgment amount.

You can do discovery for assets in aid of execution (through written discovery (such as interrogatories) and oral testimony (depositions)) if you don't know what assets a judgment debtor owns. You can execute on any assets you find (by way of levy and sale or garnishment). But what happens if all of the debtor's assets have been dissipated while you were working to get your judgment?

The conventional remedies (assuming you can trace the proceeds) include fraudulent transfer avoidance actions (see general discussion of fraudulent transfer law at Fraudulent Transfers) and involuntary bankruptcy (see discussion in Protecting Yourself Before and After a Customer's Bankruptcy ), though the former involves another lawsuit and the latter means sharing the recovery of any avoided transfers with other creditors. Needless to say, neither prospect is very satisfying (or cheap). We are often asked by creditors whether there is anything they can do to ensure collection while the lawsuit is pending (and before judgment is obtained).

The answer is, in most cases, no. The general rule is that a creditor has no right to prejudgment levy, i.e., no right to attach or place a lien on a debtor's assets (not otherwise voluntarily granted by the debtor) before a judgment has been entered. There are exceptions. One is the case where the creditor has targeted a particular asset or fund (as in the case where the creditor is seeking to avoid the transfer of a particular asset or recover a particular fund on some constructive trust theory). In those types of cases the courts have shown some willingness to at least enter injunctions to prohibit the transfer or dissipation of the asset or fund. See, e.g., Citizens Bank of Pennsylvania v. Myers, 872 A.2d 827 (Pa.Super. 2005)(freezing an account to which misapropriated funds had been traced); Walter v. Stacy, 837 A.2d 1205 (Pa. Super. 2003) (noting that preliminary injunction requiring placement of funds into escrow and requiring court approval before utilizing the funds to prevent the "unfair, wholesale dissolution of . . . assets in anticipation of civil liability" was "proper," but vacating and remanding case for imposition of a bond); American Express Travel Related Services Company, Inc. v. Laughlin, 623 A.2d 854 (Pa. Super. 1993) (affirming preliminary injunction entered to enjoin the concealing or dissipation of funds); East Hills TV & Sporting v. Dibert, 531 A.2d 507 (Pa. Super. 1987) (seller may be enjoined from using funds in seller's bank so as to prevent potential loss of funds belonging to buyer and necessary to carry on its business).

In addition, under the Uniform Fraudulent Transfer Act, there is statutory authority for a court to enjoin further transfers of property (which, though not stated, would presumably be available on a preliminary basis while the action is pending).

Finally, to the extent not otherwise expressly stated in prior case law, the Pennsylvania Superior Court has, in Ambrogi v Reber, 932 A. 2d 969 (Pa. Super. 2007), made clear that, an injunction can issue where there is evidence that the dissipation is actually occuring. The mandatory injunction entered in Ambrogi required the defendants in a pending lawsuit to account for and escrow the net proceeds of the prior and ongoing sales of their real estate holdings, and required them to petition for the use of the escrowed funds.

Ambrogi involved wrongful death and personal injury actions arising out of a fire which had been brought against the owners of an apartment building. The allegations in the complaints included that the lessors had negligently and intentionally violated building codes which caused the fire. The lessors only had $1 million of insurance coverage, and the liability was potentially greater than that. The lessors owned other property which, the plaintiffs discovered, were being sold off, after the lawsuits were commenced. Fearing that defendants were engaging in a course of conduct designed to render themselves "execution proof" from any judgments that might result from the lawsuits, the plaintiffs sought an injunction to prohibit the defendants dissipating their assets. The trial court granted the injunction (subject to the requirement that the plaintiffs post a bond), which was upheld on appeal.

Among other things, the Superior Court noted that the trial court had found that the rate of sales of the defendants' property had significantly increased after the fire, and that the defendants had failed to account for the disposition of the proceeds from the pre-injunction sales (mentioned in passing by the Superior Court but probably a "red flag" for the trial court).

Interestingly, the Superior Court did not require the plaintiffs to prove that they will win the lawsuit or that their damages will exceed the $1 million of available insurance. The Court was satisfied that the established risk of dissipation (given the nature of the injuries suffered and the allegations made) was sufficient to support the injunction.

It is important to note that the injunction did not preclude the defendants use of the proceeds. The Superior Court acknowledged that there is nothing wrong with saving, investing or spending money in a lawful manner while a lawsuit is pending, and that the injunction which was granted did not preclude defendants from listing and selling their properties, from reinvesting the net proceeds from any sales or from using the net proceeds in a manner consistent with their normal business practices. It simply prevented them from liquidating their properties for the purpose of hiding or dissipating assets. Among other things, the trial court indicated that it would establish a reasonable ceiling to the amount required to be held in escrow and that the defendants were free to petition at any time for the release of funds so that their assets could be used to run their business and are not irrationally tied-up.

While Ambrogi does not create any general right of injunctive relief (and, in any event, it should be noted that any creditor being granted such relief will need to post a bond to indemnify the defendant for any losses it suffers if the lawsuit was lost), it does provide authority for the grant of some protection where: (a) there is evidence that the defendant(s) are liquidating assets; (b) there is evidence that the liquidation is part to hide the proceeds to avoid execution; (c) the dissipation creates a substantial risk that the plaintiff(s) will be unable to collect their judgment if they are successful; and (d) the defendants are confronted with a risk of loss (either dollar amount or as to liability) that renders court intervention reasonable. Not all cases are candidates for Ambrogi style relief, but the existence of this case gives plaintiffs' the necessary authority when the facts are appropriate.





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