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

• Decision Date: 06 May 1998
• Docket Number: No. 1812,IV-,L,II-,III-,D,1812
• Citation: 143 F.3d 688
• Parties: ALLIANCE BOND FUND, INC.; Alliance World Dollar Government Fund II, Inc.; Alliance Global Dollar Fund, Inc.; Elliot Associates, L.P.; Avalon Total Return FundP.; The Varde Fund, L.P.; The Varde FundP.; The Varde FundP.; The Varde FundP.; The Varde FundP.; and The Varde FundP., Plaintiffs-Appellees, v. GRUPO MEXICANO DE DESARROLLO, S.A.; Desarrollo De Infraestructura , S.A. De C.V.; Obras Y Proyectos, S.A. De C.V.; Desarrollo Urbano Integral, S.A. de C.V., Defendants-Appellants. ocket 97-9610.
• Court: U.S. Court of Appeals — Second Circuit

Page 688

143 F.3d 688

67 USLW 3567

ALLIANCE BOND FUND, INC.; Alliance World Dollar Government

Fund II, Inc.; Alliance Global Dollar Fund, Inc.; Elliot

Associates, L.P.; Avalon Total Return Fund II-A, L.P.; The

Varde Fund, L.P.; The Varde Fund II-A, L.P.; The Varde Fund

II-B, L.P.; The Varde Fund III-A, L.P.; The Varde Fund

III-B, L.P.; and The Varde Fund IV-A, L.P., Plaintiffs-Appellees, v. GRUPO MEXICANO DE DESARROLLO, S.A.; Desarrollo De

Infraestructura , S.A. De C.V.; Obras Y Proyectos,

S.A. De C.V.; Desarrollo Urbano

Integral, S.A. de C.V.,

Defendants-Appellants.

No. 1812, Docket 97-9610.

United States Court of Appeals, Second Circuit.

Argued Feb. 20, 1998.

Decided May 6, 1998.

Richard A. Mescon, Morgan, Lewis & Bockius, New York City, for Defendants-Appellants.

Andrew J. Wertheim, Orrick, Herrington & Sutcliffe, LLP, New York City, for Plaintiffs-Appellees Elliot Associates, L.P., Avalon Total Return Fund, L.P., The Varde Fund II-A, L.P., The Varde Fund II-B, L.P., The Varde Fund III-A, L.P., The Varde Fund III-B, L.P., and The Varde Fund IV-A, L.P..

Dale C. Christensen, Jr., Seward & Kissel, New York City, for Plaintiffs-Appellees Alliance Bond Fund, Inc., Alliance World Dollar Government Fund II, Inc., and Alliance Global Dollar Government Fund, Inc..

Before: McLAUGHLIN, LEVAL, Circuit Judges, and POLLACK, District Judge. ^*

BACKGROUND

McLAUGHLIN, Circuit Judge.

Grupo Mexicano de Desarrollo, S.A. ("GMD") is a Mexican holding company that, through its subsidiaries and joint ventures, constructs and operates roadways. From 1990 to 1994, GMD participated in the Mexican government's program to develop an intercity highway network. Under this program, the Mexican government granted concessions to build and operate toll roads to companies that were willing to arrange private financing for the construction of the roads. Due to economic uncertainty, currency devaluation and other factors, the revenues from toll road traffic fell below anticipated levels.

In February, 1994, in order to retire more than $100 million of high interest Mexican bank debt and to secure working capital to The Notes are "unconditionally and irrevocably" guaranteed by the Guarantors. Both the Notes and the Guarantees are unsecured obligations that rank pari passu with all other present or future unsecured and unsubordinated indebtedness of GMD. The Plaintiffs are eleven United States investment funds that purchased approximately $75 million of the Notes (collectively "the Investors").

fund ongoing operations, GMD offered and sold to institutional investors $250 million of 8.25% notes due in 2001 (the "Notes"). The Notes are guaranteed by the five GMD subsidiaries named as co-defendants (collectively "Guarantors"). The Notes require GMD to pay interest at an annual rate of 8.25% on February 17 and August 17 of each year.

Three years later, GMD experienced serious financial difficulty. In its annual report, filed with the SEC in June, 1997, GMD admitted that its liabilities now exceeded its assets. GMD expressed "substantial doubt" that it could continue as a going concern. In August, 1997, GMD failed to make the interest payment on the Notes. The Guarantors similarly failed to step up and meet their obligations. Because of this default, the plaintiff-Investors caused acceleration of the principal.

Ten days later, the Mexican government came to the rescue by implementing the Toll Road Rescue Program. Mexico promised to issue government guaranteed Toll Road Notes to GMD and other toll road operators to reimburse them for unpaid construction receivables and expenses. In return for the Toll Road Notes, the Mexican government will eventually take over ownership and operation of the toll roads. Although the notes have not been distributed, GMD disclosed in its Third Quarter 1997 financial statement that it expected to receive $309 million in Toll Road Notes.

In addition to the debt owed to the Investors, GMD owed more than $450 million to other creditors. Its five largest creditors were the Mexican government, numerous Mexican banks, additional Mexican financial institutions, trade creditors, and terminated employees (collectively "Mexican Creditors"). Because the Mexican government's program would not fully alleviate its financial difficulties, GMD began to restructure its debt, reduce costs, and seek additional equity contributions. GMD undertook to negotiate with both the Investors and the Mexican Creditors to settle its financial obligations.

A Reuters report received by the Investors on August 27, 1997 revealed that GMD had begun to renegotiate its $256 million debt to the Mexican banks. GMD was asking for a 67% discount from the banks to match GMD's losses on the toll road investment. At the same time, GMD was also negotiating with the Investors to settle its obligations under the Notes.

One month later, the other shoe dropped. GMD issued a press release stating that during the first nine months of 1997, it had revenues of approximately $119 million, but an expected loss of approximately $802 million. After totaling its assets and debts, GMD had a negative net worth of $214 million. To the alarm of the Investors, the press release also disclosed that GMD had already assigned $117 million in Toll Road Notes to settle other obligations--$100 million to the Mexican government to pay taxes and $17 million to pay severance packages to terminated workers in accordance with Mexican law. Although GMD did not have possession of the Toll Road Notes, it placed certain assets in "trust" for these creditors with the understanding that the encumbered assets would later be exchanged for Toll Road Notes.

On December 12, 1997, the Investors commenced an action in the United States District Court for the Southern District of New York (Martin, J.), alleging that GMD had defaulted on its obligation under the Notes. The Investors sought, inter alia, damages for GMD's breach of its contractual obligations under the Notes and a preliminary injunction restraining GMD from assigning the Toll Road Notes. By order to show cause, the Investors secured a temporary One day before the hearing, GMD filed it opposition papers. In an affidavit, GMD's Senior Vice President Jorge Zapata revealed that GMD had made additional, previously undisclosed assignments of $38 million in Toll Road Notes to the Mexican banks. The next day, during a break in the hearing before Judge Martin, the clouds further darkened. GMD gave the Investors a supplemental affidavit of Jorge Zapata stating that: (1) $137 million (and not the originally reported $100 million) in Toll Road Notes had been assigned to the Mexican government; (2) $30 million (not $17 million) in Toll Road Notes had been assigned to former employees; (3) $48 million had been assigned to Mexican banks; and (4) $42.5 million had been assigned to other Mexican Creditors. Adding it all up, GMD had assigned between $214 million and $258 million of Toll Road Notes. GMD also planned to make still further assignments, leaving only $5.5 million in Toll Road Notes to satisfy the $75 million debt owed to the Investors.

restraining order precluding the transfer or encumbrance of the Toll Road Notes. Judge Martin set a hearing on the motion for a preliminary injunction for December 19, 1997.

Following a second hearing on December 23rd, Judge Martin granted the preliminary injunction (under Fed.R.Civ.P. 65) restraining GMD and the Guarantors from dissipating, transferring, conveying, or otherwise encumbering the Investor's right to receive or benefit from the issuance of the Toll Road Notes. He determined that the Investors satisfied their burden for the issuance of a preliminary injunction because: (1) they would almost certainly succeed on their breach of contract claims against GMD; and (2) without the injunction they faced an irreparable injury since GMD's financial condition and its dissipation of assets would frustrate any judgment recovered. GMD now appeals.

DISCUSSION

I. Power of the District Court to Enjoin the Use of Unrelated Assets

GMD argues that, under Fed.R.Civ.P. 65, a district court is powerless to enjoin the use of a specific asset unless the plaintiff claims an equitable interest in the asset. Because the Toll Road Notes are unrelated to the Guarantee Notes on which the Investors brought suit, GMD contends that Judge Martin could not enjoin the transfer of Toll Road Notes. GMD believes that Fed.R.Civ.P. 64 is the only procedural mechanism to prevent a litigant from concealing or transferring assets in order to frustrate a potential judgment. The two Rules, however, are complementary, not mutually exclusive.

A. Rule 64 and Rule 65

Under Federal Rule of Civil Procedure 64, "all remedies providing for the seizure of the person or property for the purpose of securing satisfaction of the judgment ultimately to be entered in the action are available under the circumstances and in the manner provided by the law of the state in which the district court is held." Fed.R.Civ.P. 64. The available remedies include arrest, attachment, garnishment, replevin, sequestration, and "other corresponding or equivalent remedies, however designated and regardless of whether by state procedure the remedy is ancillary to an action or must be obtained by an independent action." Id. We have recognized that injunctive relief may be granted under Rule 64 if authorized by the applicable state law. See In re Feit & Drexler, 760 F.2d 406, 415 n. 2 (2d Cir.1985); see also, Federal Deposit Ins. Corp. v. Antonio, 843 F.2d 1311, 1313-14 (10th Cir.1988) (enjoining use of assets under Colorado law); cf. Chemical Bank v. Haseotes, 13 F.3d 569, 572-73 (2d Cir.1994) (affirming district court's denial of injunctive relief under N.Y. U.C.C. § 8-317(6)).

Federal Rule of Civil Procedure 65 establishes the procedure for securing preliminary injunctive relief in civil actions. The purpose of a preliminary injunction is to preserve the...