NO, YOU CANNOT USE A TEMPORARY INJUNCTION TO SEQUESTER FUNDS UNRELATED TO YOUR CLAIM JUST SO YOU CAN COLLECT A POTENTIAL FUTURE JUDGMENT.

RWI Construction, Inc. v. Comerica Bank
Dallas Court of Appeals, No. 05-18-00265-CV (April 12, 2019)
Justices Brown, Schenck (Opinion, linked here), and Pedersen, III

Derrick R. Ward

Comerica Bank sued Lone Star, a private equity fund, and several of its portfolio companies after those portfolio companies failed to pay a loan guaranteed by Lone Star. The accounts receivable, inventory, equipment, fixtures, and other personal property of the portfolio companies served as collateral for the loan. Because the portfolio companies were insolvent and did not have assets adequate to cover the balance of the loan, Comerica sought and obtained a temporary injunction preventing Lone Star from dissipating funds received from a recent capital call to prevent those funds from becoming unavailable to satisfy Comerica’s claim on the loan and guarantee. On appeal, Lone Star argued the district court had abused its discretion because Comerica had not established it would suffer irreparable injury for which it had no adequate remedy at law.

The Dallas Court of Appeals held the lower court had abused its discretion by failing to follow established precedent prohibiting trial courts from issuing injunctions to freeze defendants’ assets simply to assure payment of future judgments. The Court echoed concerns expressed by the United States Supreme Court that allowing for such injunctions would create a race to the courthouse among creditors where insolvent or nearly insolvent debtors were concerned—with the fastest creditor “licensing himself, as first hog to the trough, to all of its contents.” Further, the Court said, such a practice would render obsolete statutory remedies like garnishment, attachment, and receivership.

The Court distinguished this general rule, however, from instances in which “there is a logical and justifiable connection between the claims alleged and the acts sought to be enjoined, or where the plaintiff claims a specific contractual or equitable interest in the assets it seeks to freeze.” Of the millions Comerica sought to sequester, $800,000 was an accounts receivable payment received by one of the insolvent portfolio companies, which Lone Star had then transferred to itself and refused to turn over to Comerica. Because that money was collateral for the loan in question, the Court found it was logically and justifiably connected to Comerica’s breach-of-contract claim. It therefore affirmed the trial court’s temporary injunction with respect to that amount.

Finally, the Court rejected Lone Star’s argument that the trial court’s failure to find it insolvent prevented Comerica from demonstrating an inadequate remedy at law. While insolvency can be sufficient to show an inadequate remedy, the Court explained, it is not necessary. Inadequacy might be shown, as in this case, by a defendant’s limited resources and an unwillingness to pay.