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Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc.

Supreme Court of the United States · 1999 · Civil Procedure

Civil ProcedureEquityPreliminary Injunctionspreliminary injunctionequity jurisdictionRule 65money damagesunsecured creditor

Facts

GMD issued unsecured notes, respondents bought about $75 million of them, and GMD later defaulted on an interest payment while in serious financial trouble. Respondents alleged GMD was insolvent or near insolvent and was planning to use Toll Road Notes, described as GMD's only substantial asset, to satisfy Mexican creditors and thereby frustrate any judgment respondents might obtain. Respondents sought only breach-of-contract money damages and asked for a preliminary injunction preventing transfer of the Toll Road Notes or related receivables. The district court entered the requested preliminary injunction even though respondents claimed no lien or equitable interest in those assets.

Issue

In an action seeking only money damages, may a federal district court, under Rule 65 and its equitable powers, issue a preliminary injunction preventing a defendant from transferring assets in which the plaintiff claims no lien or equitable interest? Also, was the appeal from the preliminary injunction moot after entry of final judgment and a permanent injunction?

Rule

A federal district court lacks authority to issue a preliminary injunction freezing a defendant's assets pending adjudication of a contract claim for money damages when the plaintiff is a general unsecured creditor and claims no lien or equitable interest in the assets. Federal equitable power under Rule 65 is bounded by the traditional principles and remedies administered by the English Court of Chancery in 1789, and merger of law and equity did not expand those substantive equitable powers.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In federal court in Illinois, Larkspur Capital sues Red Mesa Components for breach of a promissory note, seeking $12 million in unpaid principal and interest. Larkspur alleges Red Mesa is shifting cash among affiliates in Phoenix and may soon wire funds overseas, but Larkspur has no lien, security interest, or equitable claim to any identified asset.

May the district court issue a Rule 65 preliminary injunction freezing Red Mesa's unencumbered bank accounts pending judgment?

Explanation. The majority held that federal equitable power is limited to remedies traditionally administered by the English Court of Chancery in 1789. A general unsecured creditor seeking only money damages had no cognizable interest in the debtor's property before judgment and therefore could not obtain a prejudgment injunction freezing unencumbered assets. Rule 65 does not expand substantive equitable authority. (Derived from Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc. (1999).)