527 U.S. 308 (1999), 98-231, Grupo Mexicano De Desarrollo, S.A. v. Alliance Bond Fund, Inc.

Docket Nº:Case No. 98-231
Citation:527 U.S. 308, 119 S.Ct. 1961, 144 L.Ed.2d 319, 67 U.S.L.W. 3682, 67 U.S.L.W. 4490
Party Name:GRUPO MEXICANO de DESARROLLO, S. A., et al. v. ALLIANCE BOND FUND, INC., et al.
Case Date:June 17, 1999
Court:United States Supreme Court
 
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527 U.S. 308 (1999)

119 S.Ct. 1961, 144 L.Ed.2d 319, 67 U.S.L.W. 3682, 67 U.S.L.W. 4490

GRUPO MEXICANO de DESARROLLO, S. A., et al.

v.

ALLIANCE BOND FUND, INC., et al.

Case No. 98-231

United States Supreme Court

June 17, 1999

Argued March 31, 1999

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Syllabus

Respondent investment funds purchased unsecured notes (Notes) from petitioner Grupo Mexicano de Desarrollo, S. A. (GMD), a Mexican holding company. Four GMD subsidiaries (also petitioners) guaranteed the Notes. After GMD fell into financial trouble and missed an interest payment on the Notes, respondents accelerated the Notes' principal amount and filed suit for the amount due in Federal District Court. Alleging that GMD was at risk of insolvency, or already insolvent, that it was preferring its Mexican creditors by its planned allocation to them of its most valuable assets, and that these actions would frustrate any judgment respondents could obtain, respondents requested a preliminary injunction restraining petitioners from transferring the assets. The court issued the preliminary injunction and ordered respondents to post a $50,000 bond. The Second Circuit affirmed.

Held:

1. This case has not been rendered moot by the District Court's granting summary judgment to respondents on their contract claim and converting the preliminary injunction into a permanent injunction. Generally, the appeal of a preliminary injunction becomes moot when the trial court enters a permanent injunction because the former merges into the latter. Here, however, petitioners' potential cause of action against the injunction bond for wrongful injunction suffices to preserve the Court's jurisdiction, since petitioners' argument that the District Court lacked the power to restrain their use of assets pending a money judgment is independent of their defense against the money judgment on the merits. For the same reason, petitioners' failure to appeal the conversion of the preliminary injunction into a permanent injunction does not forfeit their claim on the bond. Pp. 313-318.

2. The District Court lacked the authority to issue a preliminary injunction preventing petitioners from disposing of their assets pending adjudication of respondents' contract claim for money damages because such a remedy was historically unavailable from a court of equity. Pp. 318-333.

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(a) The federal courts have the equity jurisdiction that was exercised by the English Court of Chancery at the time the Constitution was adopted and the Judiciary Act of 1789 was enacted. Pp. 318-319.

(b) The well-established general rule was that a judgment fixing the debt was necessary before a court in equity would interfere with the debtor's use of his property. See, e. g., Pusey & Jones Co. v. Hanssen, 261 U.S. 491, 497. It is by no means clear that there are any exceptions to the general rule relevant to this case, and the lower courts did not address this point. The merger of law and equity did not change the rule, since the merger did not alter substantive rights. The rule was regarded as serving not merely the procedural end of assuring exhaustion of legal remedies, but also the substantive end of giving the creditor an interest in the property which equity could act upon. Pp. 319-324.

(c) The postmerger cases of Deckert v. Independence Shares Corp., 311 U.S. 282, United States v. First Nat. City Bank, 379 U.S. 378, and De Beers Consol. Mines, Ltd. v. United States, 325 U.S. 212, are entirely consistent with the view that the preliminary injunction in this case was beyond the District Court's equitable power. Pp. 324-327.

(d) The English Court of Chancery did not provide a prejudgment injunctive remedy until 1975, and the decision doing so has been viewed by commentators as a dramatic departure from prior practice. Enjoining the debtor's disposition of his property at the instance of a nonjudgment creditor is incompatible with this Court's traditionally cautious approach to equitable powers, which leaves any substantial expansion of past practice to Congress. Pp. 327-329.

(e) The various weighty considerations both for and against creating the remedy at issue here should be resolved not in this forum, but in Congress. Pp. 329-333.

143 F.3d 688, reversed and remanded.

Scalia, J., delivered the opinion for a unanimous Court with respect to Part II, and the opinion of the Court with respect to Parts I, III, and IV, in which Rehnquist, C. J., and O'Connor, Kennedy, and Thomas, JJ., joined. Ginsburg, J., filed an opinion concurring in part and dissenting in part, in which Stevens, Souter, and Breyer, JJ., joined, post, p. 333.

Richard A. Mescon argued the cause for petitioners. With him on the briefs were Scott S. Balber and Peter Buscemi.

Drew S. Days III argued the cause for respondents. With him on the brief were Kenneth W. Irvin, Dale C. Christensen,

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Jr., John J. Galban, Jeremy G. Epstein, Stephen J. Marzen, Meredith Kolsky Lewis, Andrew J. Wertheim, and Lisa T. Simpson. [ *]

Justice Scalia delivered the opinion of the Court.

This case presents the question whether, in an action for money damages, a United States District Court has the power to issue a preliminary injunction preventing the defendant from transferring assets in which no lien or equitable interest is claimed.

I

Petitioner Grupo Mexicano de Desarrollo, S. A. (GMD), is a Mexican holding company. In February 1994, GMD issued $250 million of 8.25% unsecured, guaranteed notes due in 2001 (Notes), which ranked pari passu in priority of payment with all of GMD's other unsecured and unsubordinated debt. Interest payments were due in February and August of every year. Four subsidiaries of GMD (which are the remaining petitioners) guaranteed the Notes. Respondents are investment funds which purchased approximately $75 million of the Notes.

Between 1990 and 1994, GMD was involved in a toll road construction program sponsored by the Government of Mexico. In order to elicit private financing, the Mexican Government granted concessions to companies that would build and operate the system of toll roads. GMD was both an investor in the concessionaries and among the construction companies hired by the concessionaries to build the toll

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roads. Problems in the Mexican economy resulted in severe losses for the concessionaries, who were therefore unable to pay contractors like GMD. In response to these problems, in 1997, the Mexican Government announced the Toll Road Rescue Program, under which it would issue guaranteed notes (Toll Road Notes) to the concessionaries, in exchange for their ceding to the Government ownership of the toll roads. The Toll Road Notes were to be used to pay the bank debt of the concessionaries, and also to pay outstanding receivables held by GMD and other contractors for services rendered to the concessionaries (Toll Road Receivables). In the fall of 1997, GMD announced that it expected to receive approximately $309 million of Toll Road Notes under the program.

Because of the downturn in the Mexican economy and the related difficulties in the toll road program, by mid-1997 GMD was in serious financial trouble. In addition to the Notes, GMD owed other debts of about $450 million. GMD's 1997 Form 20-F, which was filed with the Securities and Exchange Commission on June 30, 1997, stated that GMD's current liabilities exceeded its current assets and that there was "substantial doubt" whether it could continue as a going concern. As a result of these financial problems, neither GMD nor its subsidiaries (who had guaranteed payment) made the August 1997 interest payment on the Notes.

Between August and December 1997, GMD attempted to negotiate a restructuring of its debt with its creditors. On August 26, Reuters reported that GMD was negotiating with the Mexican banks to reduce its $256 million bank debt, and that it planned to deal with this liability before negotiating with the investors owning the Notes. On October 28, GMD publicly announced that it would place in trust its right to receive $17 million of Toll Road Notes, to cover employee compensation payments, and that it had transferred its right to receive $100 million of Toll Road Notes to the Mexican

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Government (apparently to pay back taxes). GMD also negotiated with the holders of the Notes (including respondents) to restructure that debt, but by December these negotiations had failed.

On December 11, respondents accelerated the principal amount of their Notes, and, on December 12, filed suit for the amount due in the United States District Court for the Southern District of New York (petitioners had consented to personal jurisdiction in that forum). The complaint alleged that "GMD is at risk of insolvency, if not insolvent already"; that GMD was dissipating its most significant asset, the Toll Road Notes, and was preferring its Mexican creditors by its planned allocation of Toll Road Notes to the payment of their claims, and by its transfer to them of Toll Road Receivables; and that these actions would "frustrate any judgment" respondents could obtain. App. 29-30. Respondents sought breach-of-contract damages of $80.9 million, and requested a preliminary injunction restraining petitioners from transferring the Toll Road Notes or Receivables. On that same day, the District Court entered a temporary restraining order preventing petitioners from transferring their right to receive the Toll Road Notes.

On December 23, the District Court entered an order in which it found that "GMD is at risk of insolvency if not already insolvent"; that the Toll Road Notes were GMD's "only substantial asset"; that GMD planned...

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