Delaware Bankruptcy Judge Reminds Plaintiffs Seeking Prejudgment Injunctive Relief to Keep Grupo Mexicano and Granfinanciera in Mind
In April, Delaware Bankruptcy Judge John Dorsey issued a Memorandum Opinion in BYJU's Alpha, Inc. v. Camshaft Capital Fund, LP (In re BYJU's Alpha, Inc.), 661 B.R. 109 (Bankr. D. Del. 2024), considering whether the Bankruptcy Court had the authority to grant the Debtor's request for prejudgment attachment of missing assets where the Debtor had asserted fraudulent transfer claims seeking monetary relief. In other words, could the Bankruptcy Court grant prejudgment injunctive relief where the plaintiff asserted a claim sounding in law?
The court began with a brief discussion of the U.S. Supreme Court's rulings in Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999) and Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989). In Grupo Mexicano, the U.S. Supreme Court considered whether a district court had the authority to issue a temporary restraining order prior to adjudication of the petitioner's pending contract claim. The Court ultimately held that the district court did not have the authority to issue a preliminary injunction preventing the petitioners from disposing of their assets pending adjudication of the contract claim for money damages. See Grupo Mexicano, 527 U.S. at 333. According to Judge Dorsey, "[t]he Court's ruling in Grupo Mexicano ultimately stands for the proposition that a court may not issue an equitable remedy, such as an asset freezing injunction, where the plaintiff's claims are purely legal in nature." BYJU's Alpha, 661 B.R. at 118.
In Granfinanciera, the U.S. Supreme Court considered "whether a person who has not submitted a claim against a bankruptcy estate has a right to a jury trial when sued by the trustee in bankruptcy to recover an allegedly fraudulent monetary transfer." Granfinanciera, 492 U.S. at 36. The Court noted that the right to a jury trial under the Seventh Amendment is limited to "suits in which legal rights were to be ascertained and determined, in contradistinction to those where equitable rights alone were recognized[.]" Id. at 41 (internal quotation marks omitted) (emphasis in original). Thus, the question in Granfinanciera was whether a claim for avoidance of a monetary fraudulent transfer was legal or equitable in nature. The Court held that a fraudulent transfer action may be legal or equitable in nature, depending on whether the plaintiff seeks the return of a specific asset (in which case the claim is equitable) or money damages for the asset transferred (in which case the claim is legal).
According to Judge Dorsey, "[t]aken together, Grupo Mexicano and Granfinanciera stand for the proposition that there is no right to prejudgment attachment of assets in a fraudulent transfer claim that only seeks monetary damages." BYJU's Alpha, 661 B.R. at 120. However, Judge Dorsey identified two contexts in which a plaintiff asserting a fraudulent transfer claim seeking monetary damages can nevertheless obtain prejudgment injunctive relief.
First, Grupo Mexicano left open the possibility that state law may independently provide for prejudgment attachment. Id. (citing Grupo Mexicano, 527 U.S. at 330-31). In BYJU's Alpha, the Debtor had asserted fraudulent transfer claims under both the Bankruptcy Code and the Delaware Uniform Fraudulent Transfer Act (DUFTA). Under DUFTA, a creditor in a fraudulent transfer action may obtain an attachment or other provisional remedy against the asset transferred or other property of the transferor, including an injunction against further disposition of the asset transferred or of other property, as well as "[a]ny other relief the circumstances may require." 6 Del. Code § 1307(a)(2)-(3). Judge Dorsey noted that nothing in DUFTA "eliminates the possibility of a prejudgment attachment where only monetary remedies are sought by the plaintiff" and found that, "under DUFTA, the Debtor here has a right to seek attachment against the fraudulently transferred funds without first obtaining a judgment for the money." BYJU's Alpha, 661 B.R. at 121.
Second, Judge Dorsey determined that equitable remedies may be appropriate where a plaintiff seeking monetary damages in a fraudulent conveyance action alleges additional claims "sounding in equity." Id. at 121 (internal quotation marks omitted). In BYJU's Alpha, the Debtor had also asserted a claim against its former director and officer for breach of fiduciary duty, which Judge Dorsey concluded "is a historically equitable claim, even where the relief sought is disgorgement and damages." Id. In addition, although the Debtor had not specifically requested accounting in its complaint, Judge Dorsey concluded that the complaint sufficiently alleged a dispute over the location of the Debtor's missing funds to imply accounting as an equitable remedy. Id. at 122.
Thus, the court held that "the Debtor's claims for breach of fiduciary duty and accounting allow for equitable relief to issue . . . in addition to the independent authority to order a prejudgment attachment provided by DUFTA." Id.
BYJU's Alpha serves as a reminder that plaintiffs should keep Grupo Mexicano and Granfinanciera in mind when drafting complaints with an eye towards obtaining prejudgment equitable relief, and should consider including claims sounding in equity and/or state law claims that contemplate prejudgment equitable remedies.
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