Obtaining A Prejudgment Attachment Order Is Not Easy, Even Where Fraud Is Alleged
- Posted on: Jul 28 2017
Prejudgment attachment is a provisional remedy that provides a plaintiff with a statutory mechanism by which he/she can secure a defendant’s assets during the pendency of a lawsuit. In effect, an order of attachment is a lien against a defendant’s property. As such, a prejudgment order of attachment increases the likelihood of recovery on a later-obtained judgment in the action.
The requirements for obtaining a prejudgment attachment order vary from state to state; there is no federal law or common law right to prejudgment attachment. Generally, the plaintiff (or creditor) must: (1) have a pending lawsuit for damages, (2) identify the property or asset to be attached in detail, (3) claim a legal right to that property or asset, and (4) demonstrate the need to secure the property or asset prior to the conclusion of the lawsuit.
The Law in New York
In New York, the grounds for obtaining a prejudgment attachment are set forth in Civil Practice Law & Rules Sections 6201(1) through 6201(5). Under these sections, a plaintiff may obtain a prejudgment attachment order when, for example: the defendant is a foreign corporation not qualified to do business in New York (CPLR 6201(1)); the defendant with intent to defraud creditors or frustrate enforcement of a judgment that might be rendered in the plaintiff’s favor, has assigned, disposed of, encumbered or secreted property, or removed property from the state or is about to do so (CPLR 6201(3)); or the cause of action is based on a judgment, decree or order of a court of the United States or of any other court that is entitled to full faith and credit in New York state, or on a judgment that qualifies for recognition in New York. (CPLR 6201(5).)
Attachment is considered to be a drastic remedy. For this reason, the plaintiff must establish that there is a cause of action against the defendant, that it is probable the plaintiff will succeed on the merits (which requires more than the allegations required for a complaint), that one or more statutory grounds for attachment are met, and that the amount demanded exceeds all known counterclaims. CPLR 6212(a). The moving papers must contain evidentiary facts — as opposed to conclusions — proving the basis upon which the attachment remedy is sought. (Societe Generale Alsacienne De Banque, Zurich v. Flemingdon Dev. Corp., 118 A.D.2d 769, 773 (2d Dept. 1986). Because prejudgment attachment is a drastic remedy, New York courts “strictly construe[ ]” CPLR 6201 “in favor of those against whom it may be employed.” Northeast United Corp. v. Lewis, 137 A.D. 3d 1387, 1388 (3d Dept. 2016) (citation and internal quotation marks omitted).
Where fraud is alleged, under CPLR 6201(3), “the plaintiff must demonstrate that the defendant has concealed or is about to conceal property in one or more of several enumerated ways, and has acted or will act with the intent to defraud creditors or to frustrate the enforcement of a judgment that might be rendered in favor of the plaintiff’.” VNB NY, LLC v. Rapaport, 2016 NY Slip Op 50099 (Sup. Ct., Kings Co. Jan. 29, 2016) (citations omitted). “[M]ere removal, assignment or other disposition of property is not grounds for attachment.” (Computer Strategies v. Commodore Bus. Machs., 105 A.D.2d 167, 173 (2d Dept. 1984). “The moving papers must contain evidentiary facts, as opposed to conclusions, proving the fraud.” Id. Thus, it is not sufficient to merely raise a suspicion of an intent to defraud. Skycom SRL v. FA & Partners, Inc., 2016 NY Slip Op 32405 (Sup. Ct., N.Y. Co. Dec. 7, 2016). Rather, “it must appear that such fraudulent intent really existed in the mind of the defendants, and not merely in the ingenuity of the plaintiffs.” Id. (citation and internal quotation marks omitted).
However, even when the plaintiff satisfies the statutory grounds for an attachment, he/she still “must demonstrate an identifiable risk that the defendant will not be able to satisfy the judgment.” Mascis Inv. P’ship v. SG Cap. Corp., 2017 NY Slip Op 30813 (Sup. Ct., N.Y. Co. Apr. 21, 2017) (quoting VisionChina Media Inc. v. Shareholder Representative Servs., LLC, 109 A.D.3d 49, 60 (1st Dept. 2013)); see also Siegel, NY Prac, § 317 (5th ed) (“Even if the plaintiff makes out a case for attachment under CPLR 6201, its granting is still discretionary with the court. . . . [I]f the judge should perceive from the papers that the plaintiff does not need an attachment, either for jurisdiction or security, discretion is appropriately exercised against it even though a CPLR 6201 showing has been made.”). The risk “should be real.” VisionChina, 109 A.D.3d at 60 (citation and internal quotation marks omitted). In this regard, the court may consider the defendant’s financial position (i.e., whether the defendant is in “serious financial distress” (Elton Leather Corp. v. First Gen. Resources Co., 138 A.D.2d 132, 134 (1st Dept. 1988)) or past and present conduct, including the defendant’s history of paying creditors and any statements or action evincing an intent to dispose of assets. VisionChina, 109 A.D.3d at 60.
In addition, the plaintiff must post a bond, in an amount not less than $500 as fixed by the court, for the purpose of making the defendant whole for all costs and damages, including reasonable attorneys’ fees, which may be sustained by the reason of the attachment if the defendant recovers judgment or it is finally decided that the plaintiff was not entitled to an attachment order. CPLR 6212(b). Typically, courts require the undertaking to be in an amount equal to or greater than the amount of the attachment. E.g., Von Bock v Metropolitan Life Ins. Co., 223 A.D.2d 700 (2d Dept. 1996).
Finally, a plaintiff may obtain an order of attachment on an ex parte basis (without notice to the defendant being attached). However, if an attachment order is granted on an ex parte basis, the plaintiff must move within five (5) days after levy on notice to the defendant, garnishee and sheriff for an order confirming the attachment.
Del Forte USA, Inc. v. Blue Beverage Group, Inc.
On July 17, 2017, in Del Forte USA, Inc. v. Blue Beverage Group, Inc., 2017 NY Slip Op. 31525(U), Justice Ash of the New York Supreme Court, Kings County, Commercial Division, considered the foregoing principles and declined to grant the plaintiff’s motion for a prejudgment attachment order under CPLR 6201(3) due to a lack of evidence of fraudulent intent.
The case arose from a dispute between the plaintiff Del Forte USA, Inc., a manufacturer and seller of cold coffee beverages, and Blue Beverage Group Inc. over, among other things, the latter’s alleged failure to carry out the retort process (i.e., the process that enables beverages containing milk to remain on retail shelves unrefrigerated for about a year) for Del Forte’s coffee beverages. Based on Blue Beverage’s alleged failures, Del Forte claimed that it sustained direct and consequential damages in excess of $500,000.
Del Forte moved for a temporary restraining order to prevent the sale of Blue Beverage’s assets to the Kuzari Group LLC (“Kuzari”), another defendant in the action, unless at least $500,000 of the sale proceeds were placed in escrow for the benefit of the plaintiff, or, in the alternative, for appointment of a receiver, because the transaction would result in a fraudulent transfer under New York Debtor and Creditor Law § 279 (“DCL”). In the alternative, Del Forte sought an order of attachment against the funds paid by Kuzari for Blue Beverage’s assets to ensure that any judgment that may be obtained by Del Forte against the Blue Beverage defendants could be satisfied. Del Forte sought an attachment of at least $500,000 to pay the damages owed by Blue Beverage, and its two owners, Joseph Goldberger (“Goldberger”) and Joseph Menczer (“Menczer”).
Del Forte contended that Blue Beverage was insolvent and had intentionally failed to pay its creditors and suppliers. It claimed that numerous pending lawsuits, some of which had resulted in default judgments against Blue Beverage, demonstrated this point, in addition to fraudulent judgments that were filed against Blue Beverage in favor of the Blue Beverage defendants’ family members and insiders, which totaled over $13 million, including a judgment for nearly $7 million in favor of Goldberger’s wife. Del Forte argued that these fraudulent and collusive judgments, combined with Blue Beverage’s repeated failure to pay its creditors, demonstrated that any proceeds received from the sale of Blue Beverage and its assets would be dissipated by the Blue Beverage defendants through payments to their family members and insiders, leaving Blue Beverage insolvent and unable to satisfy any judgment it obtained.
In response, the Blue Beverage defendants argued that the Kuzari Group’s contemplated investment in Blue Beverage would result in no harm to Del Forte because it could continue to litigate its claims (namely, its breach of contract claim) against Blue Beverage. The Blue Beverage defendants further argued that Del Forte was not entitled to relief under CPLR 6201 or the DCL because Del Forte failed to satisfy its burden of proving fraud or intent to defraud by the Blue Beverage defendants.
The Court’s Decision
After citing to some of the authorities mentioned above, the Court denied Del Forte’s motion and vacated the temporary restraining order it had previously granted. In doing so, the Court found that Del Forte failed to satisfy its burden of proving that Blue Beverage intended to defraud by entering into the transaction with the Kuzari Group:
Here, upon consideration of the foregoing and the record before the Court, the Court finds that Plaintiff has not sufficiently satisfied its burden to obtain the relief that it seeks. Specifically, Plaintiff has not demonstrated that the Blue Beverage Defendants are entering into the subject transaction with the intent to defraud creditors. Plaintiff also fails to establish that $5 million constitutes inadequate consideration for what the Kuzari Group seeks to purchase from Blue Beverage and, further, what the value or worth of Blue Beverage is overall. Although Plaintiff provides plenty of evidence of potential judgment creditors of Blue Beverage, there is no evidence that the proposed transaction between the Kuzari Group and Blue Beverage is one that aims to defraud or frustrate potential creditors, nor is there any indication that the proposed sale will render Blue Beverage an “empty shell” of a corporation. Accordingly, the relief that Plaintiff seeks must be denied at this time.
To obtain an order of attachment under CPLR 6201(3), a plaintiff must demonstrate, with evidence, that the defendant has concealed or is about to conceal property, “and has acted or will act with the intent to defraud creditors, or to frustrate the enforcement of a judgment that might be rendered in favor of the plaintiff.” Benedict v. Browne, 289 A.D.2d 433, 433 (2d Dept. 2001). Since New York courts strictly construe CPLR 6201 “in favor of those against whom it may be employed” (Hume v. 1 Prospect Park ALF, LLC, 137 A.D.3d 1080, 1081 (2d Dept. 2016)), the burden on the movant is high. Del Forte learned this lesson the hard way.