Grupo Mexicano de Desarrollo v. Alliance Bond Fund, et al. (06/17/1999)

By: Laurel Druley, Medill News Service

Questions presented

Is a United States District Court empowered to issue a preliminary injunction prohibiting a defendant from transferring or assigning assets unrelated to the plaintiff's underlying claim and held outside of the court's jurisdiction in order to ensure that funds will be available to satisfy a potential money judgment?

Brief

When Grupo Mexicano de Desarrollo could not pay back its investors who helped fund a $300 million highway building program in Mexico, the investors sued GMD alleging the company broke its contract.

Grupo Mexicano de Desarrollo is a Mexican holding company that constructs roads. In 1994, GMD issued and sold $250 million worth of Mexican highway bonds to institutional investors. About $75 million of the debt notes were purchased by U.S.-based Alliance Bond Fund. GMD was obligated to pay interest twice a year. Four GMD subsidiaries guaranteed payment of the notes, which were due in 2001.

With the funding, GMD was able to participate in the Mexican government's inter-city highway network development program.

In 1997, GMD began experiencing financial trouble due to currency devaluation and other economic uncertainties. The Mexican government could not pay millions of dollars worth of invoices for the construction projects, causing GMD to default on its interest payment obligations in August 1997.

The Mexican government implemented the Toll Road Rescue Program and promised to reimburse GMD. The company expected to receive $309 million in toll road notes.

However, GMD owed more than $450 million to other creditors, including the Mexican government, several Mexican banks, trade creditors and terminated employees.

At the end of 1997 GMD announced that they had revenues of about $119 million but a loss of $802 million. Alliance filed suit, charging GMD with breach of contract.

Alliance was afraid GMD would assign all the Mexican government notes to other creditors, leaving the U.S. funds holding only worthless paper.

GMD argued that the Mexican government bonds were not the investments purchased by Alliance.

Thus, according to Scott Dalber, the attorney representing GMD, the court ""prevented the company from running business until the debt is paid."" How can the company make money to pay back noteholders if GMD cannot run their business, he asked.

The U.S. District Court granted an injunction that barred GMD from signing notes and transferring its assets for any purpose other than to repay its creditors.

GMD appealed, arguing in the 2nd Circuit Court of Appeals that injunctive relief was not available under Rule 65 of the Federal Rules of Civil Procedure because the plaintiffs did not claim any direct legal or equitable interest in the asset whose use they sought to enjoin. GMD contended that attachment under the state law (as incorporated into Rule 64) was the plaintiffs' sole remedy. Since the Mexican notes were not located in New York, or in the United States for that matter, they were not subject to attachment.

The appeals court affirmed the district court's injunction. Writing for a unanimous court, Judge Joseph McLaughlin said, the two federal rules were complementary, not mutually exclusive. The court held that a trial court with personal jurisdiction over a defendant could issue an injunction against the defendant and freeze any property under the defendant's control, even property located outside the U.S.

The U.S. Supreme Court granted certiorari on Nov. 30, 1998, and limited review to the question above.

On June 17, 1999, the Court reversed by a vote of 5-4, holding that the trial court lacked the authority to issue a preliminary injunction that prevented GMD from disposing of their assets pending adjudication of Alliance's contract claim for money damages because such a remedy was historically unavailable from a court of equity. Writing for the majority, Justice Antonin Scalia said that creditors must first prevail in the case. To allow them to enjoin the transfer of property beforehand ""could radically alter the balance between debtor's and creditor's rights"" and encourage creditors to ""engage in a race to the courthouse,"" Scalia wrote.

In dissent, Justice Ruth Bader Ginsburg wrote for Justices John Paul Stevens, David Souter and Stephen Breyer that because assets today can be transferred almost instantaneously, courts should be allowed to keep parties from ""making themselves judgment-proof"" by transferring assets during a lawsuit.