When a U.S. plaintiff asserts claims against a non-U.S. defendant and is concerned about the likelihood of finding assets located in the United States that could satisfy an eventual judgment, the plaintiff might instead look for opportunities to recover on the assets of the defendant's U.S.-based non-party affiliates—whether funds in a U.S. bank account, proceeds from a publicized asset sale or divestiture, and/or real property—even though those assets are the property of a separate corporate entity. This article discusses those issues and proposes a strategy that a non-U.S. defendant can use to defeat those efforts.
What is Prejudgment Attachment?
Parties in civil actions filed in the United States have various provisional remedies available to protect their interests during the pendency of an action. One such remedy is prejudgment attachment of the opposing party's assets located within the court's jurisdiction. Obtaining a prejudgment attachment of the opposing party's property increases the chances of securing a favorable outcome in settlement and recovery on a judgment issued in the action.
In the typical case, a plaintiff would seek an attachment at the commencement of the action simultaneously with the filing of a complaint. That request is often initiated by way of a motion for a temporary restraining order (TRO) that can be granted ex parte without the participation of the defendant or, in cases where non-party assets are targeted for attachment, the non-party. Of course, after the defendant enters an appearance in the action it would have an opportunity to challenge the request for TRO and/or attachment.
The requirements for prejudgment attachment vary from state to state, but generally the party seeking attachment must: (1) have brought an action for damages; (2) identify, in detail, the property or asset sought to be attached; (3) assert a legal right to the property or asset; and (4) show that there is a need to secure the property or asset while the action is pending in order to maintain the status quo or prevent the opposing party from secreting the property or asset out of the court's jurisdiction.
In New York, Article 62 of the Civil Practice Law & Rules (CPLR) governs attachment in civil litigation. The plaintiff must show, either by affidavit or other written evidence, that it has stated a cause of action, that it is probable that the plaintiff will succeed on the merits, that one or more grounds for attachment exist, and that the amount demanded from the defendant exceeds all counterclaims known to the plaintiff. See CPLR 6212(a). Section 6201 provides the various grounds for attachment, which include, among others, that: (1) the defendant, with intent to defraud its creditors or to frustrate enforcement of a judgment, has disposed of or removed property from the state, or is about to; (2) the cause of action is based on a judgment entitled to recognition in New York; and (3) the defendant is a foreign corporation not qualified to do business in the state. This last ground may be available and easy to satisfy in cases where the defendant is a non-U.S. entity and the plaintiff seeks to attach the property of its U.S.-based affiliate even though that affiliate is not a party to the action.
What to Do If This Happens to You
A non-U.S. defendant facing the threat of attachment of its U.S. affiliate's property or assets may oppose the request for TRO and attachment. If the non-U.S. defendant has appeared in the action it can seek to vacate any TRO that has been entered and/or oppose its entry and any pending motion for attachment. Alternatively, the U.S. affiliate could intervene in the action as of right to challenge a TRO as a non-party with an interest in the property or asset affected by the TRO. If attachment has been granted, the non-party U.S. affiliate can file a special proceeding under CPLR 6221 to assert its rights to the attached property and seek to vacate the attachment.
Regardless of which party—the defendant or its non-party affiliate—opposes the attachment, the grounds for opposition will be similar. First and foremost among those grounds would be that plaintiff's claims are asserted against the defendant, not the non-party affiliate, but is seeking to attach the non-party's property in which the defendant has no interest and/or control.
CPLR 6202 permits attachment of any debt or property against which a money judgment could be enforced, including any property which could be assigned or transferred, regardless of whether it consists of a present or future right or interest and whether or not it is vested. New York courts interpret this requirement to mean "property that the [defendant] has the power to assign or transfer." Bass v. Bass, 140 A.D.2d 251, 253, 528 N.Y.S.2d 558, 561 (1st Dep't 1988). While a party seeking attachment may eventually "stand in the shoes of the [defendant] in relation to any debt owed him or a property interest he may own," that party "cannot, however, reach assets in which the [defendant] has no interest." Id.
The question then becomes whether the defendant has an assignable or transferable interest in its affiliate's property. The party or non-party opposing attachment can rely on one of the fundamental aspects of corporate law: that affiliated corporate entities, such as parents and subsidiaries, are legally distinct entities that do not own or have legal title to the assets of one another. See Dole Food Co. v. Patrickson, 538 U.S. 468, 475 (2003).
The plaintiff may seek to avoid the application of Dole Food by arguing that the defendant and the non-party affiliate are alter egos and that the court should pierce the corporate veil. In New York, piercing the corporate veil requires a showing that: (1) the defendant exercised complete domination over the corporation with respect to the transaction at issue; and (2) such domination was used to commit a fraud or wrong against the plaintiff which resulted in the plaintiff's injury. Morris v. State Dep't of Taxation & Fin., 82 N.Y.2d 135, 141, 623 N.E.2d 1157, 1160-61 (1993). That standard is often difficult to meet. Courts consider factors such as failure to adhere to corporate formalities, inadequate capitalization of a subsidiary, commingling of assets between the companies, and overlapping management/control. See Shisgal v. Brown, 21 A.D.3d 845, 848, 801 N.Y.S.2d 581, 584 (1st Dep't 2005). All companies should be aware of these factors and endeavor to maintain corporate formalities and separateness to avoid being held liable for the acts of their affiliates. In the case of a non-U.S. entity with a U.S. subsidiary or affiliate, corporate separateness takes on additional importance where a plaintiff can only reach the affiliate's assets in the United States. If the plaintiff cannot convince the court that it should pierce the corporate veil, it is unlikely that a court will grant or maintain a TRO or attachment affecting the non-party's assets.
It is also possible to successfully defeat an attachment by arguing that the plaintiff has failed to establish one or more statutory grounds for attachment in CPLR 6201, that the plaintiff is not likely to succeed on the merits of the case, or that it has failed to show that there is a real and identifiable risk that the defendant will not be able to satisfy an eventual judgment. These grounds are all very fact specific, with success depending upon the strength of those facts favorable to the party opposing the attachment.
Moreover, a party or non-party opposing attachment may also be able to successfully argue that attaching a non-party's assets would violate the non-party's right to due process if it has not been given sufficient notice and opportunity to oppose the TRO and attachment.
If the court grants attachment, it should do so subject to the posting of a bond sufficient to cover any damages incurred by a wrongful attachment. See CPLR 6212(b). If the defendant or non-party has not had the opportunity to oppose the application, it should nonetheless seek the entry of an order requiring a bond if the court does not do so sua sponte.
A non-U.S. party facing the threat of litigation in the United States should be aware of the possibility that the opposing party could seek an order of prejudgment attachment against the assets of the non-U.S. party's U.S. subsidiaries or other U.S.-based affiliated entities. By adhering to corporate formalities and maintaining clearly delineated and separate ownership and control of corporate assets, non-U.S. entities can lessen the likelihood that its U.S. affiliate's property will be subject to attachment.