Grupo Mexicano de Desarrollo v Alliance Bond Fund

• Decision Date: 17 June 1999
• Docket Number: 98231
• Citation: 144 L.Ed.2d 286,527 U.S. 263,119 S.Ct. 1936
• Parties: SUPREME COURT OF THE UNITED STATES231 GRUPO MEXICANO de DESARROLLO, S. A., et al., PETITIONERS v. ALLIANCE BOND FUND, INC., et al. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT [
• Court: U.S. Supreme Court

527 U.S. 263

119 S.Ct. 1936

144 L.Ed.2d 286

SUPREME COURT OF THE UNITED STATES

No. 98 231

GRUPO MEXICANO de DESARROLLO, S. A., et al., PETITIONERS v ALLIANCE BOND FUND, INC., et al.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

[June 17, 1999]

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 who 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 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 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 to use the Toll Road Notes "to satisfy its Mexican creditors to the exclusion of [respondents] and other holders of the Notes"; that "[i]n light of [petitioners'] financial condition and dissipation of assets, any judgment [respondents] obtain in this action will be frustrated"; that respondents had demon- strated irreparable injury; and that it was "almost certain" that respondents would succeed on the merits of their claim. App. to Pet. for Cert. 25a 26a. It preliminarily enjoined petitioners "from dissipating, disbursing, transferring, conveying, encumbering or otherwise distributing or affecting any [petitioner's] right to, interest in, title to or right to receive or retain, any of the [Toll Road Notes]." Id., at 26a. The court ordered respondents to post a $50,000 bond.

The Second Circuit affirmed. 143 F.3d 688 (1998). We granted certiorari, 525 U.S. ___ (1998).

II

Respondents contend that events subsequent to petitioners' appeal of the preliminary injunction render this case moot. While that appeal was pending in the Second Circuit, the case proceeded in the District Court. Petitioners filed an answer and asserted various counterclaims. On April 17, 1998, the District Court granted summary judgment to respondents on their contract claim and dismissed petitioners' counterclaims. The court ordered petitioners to pay respondents $82,444,259 by assignment or transfer of Toll Road Receivables or Toll Road Notes; the court also converted the preliminary injunction into a permanent injunction pending such assignment or transfer. Although petitioners initially appealed both portions of this order to the Second Circuit, they later abandoned their appeal from the permanent injunction. The appeal from the payment order is still pending in the Second Circuit. The same date the District Court entered judgment, respondents moved to dismiss petitioners' first appeal the one now before us arguing that the final judgment rendered the appeal moot. On May 4, the Second Circuit denied the motion to dismiss and two days later affirmed, as mentioned above, the District Court's grant of the preliminary injunction.

Respondents argue that the issue of the propriety of the preliminary injunction is moot because that injunction is now merged into the permanent injunction. Petitioners contend that the case is not moot because, if we hold that the District Court was without power to issue the preliminary injunction, then under Federal Rules of Civil Procedure 65(c) and 65.11 they will have a claim against the injunction bond. They assert that the injunction "interfered with GMD's efforts to restructure its debt and substantially impaired GMD's ability to continue its operations in the ordinary course of business." Brief for Petitioners 7. Respondents concede that a party who has been wrongfully enjoined has a claim on the bond, but they argue that although such a claim might mean that the case is not moot, it does not prevent this interlocutory appeal from becoming moot. In any event, say respondents, because a claim for wrongful injunction requires that the enjoined party win on the ultimate merits, petitioners have forfeited any claim by failing to appeal the portion of the District Court's judgment converting the preliminary injunction into a permanent injunction.

Generally, an appeal from the grant of a preliminary injunction becomes moot when the trial court enters a permanent injunction, because the former merges into the latter. We have dismissed appeals in such circumstances. See, e.g., Smith v. Illinois Bell Telephone Co., 270 U.S. 587, 588 589 (1926). We agree with petitioners, however, that their potential cause of action against the injunction bond preserves our jurisdiction over this appeal. Cf. Liner v. Jafco, Inc., 375 U.S. 301, 305 306 (1964).

In the case of the usual preliminary injunction, the plaintiff seeks to enjoin, pending the outcome of the litigation, action that he claims is unlawful. If his lawsuit turns out to be meritorious if he is found to be entitled to the permanent injunction that he seeks even if the preliminary injunction was wrongly issued (because at that stage of the litigation the plaintiff's prospects of winning were not sufficiently clear, or the plaintiff was not suffering irreparable injury) its issuance would in any event be harmless error. The final injunction establishes that the defendant should not have been engaging in the conduct that was enjoined. Hence, it is reasonable to regard the preliminary injunction as merging into the final one: If the latter is valid, the former is, if not procedurally correct, at least harmless. A quite different situation obtains in the present case, where (according to petitioners' claim) the substantive validity of the final injunction does not establish the substantive validity of the preliminary one. For the latter was issued not to enjoin unlawful conduct, but rather to render unlawful conduct that would otherwise be permissible, in order to protect the anticipated judgment of the court; and...