Summary
finding no irreparable harm to support motion for preliminary injunction to freeze certain funds because "BACM has presented no evidence that QSI is insolvent"
Summary of this case from Commodigy OG Vegas Holdings, LLC v. ADM LabsOpinion
Case No. 3:02CV7466.
January 14, 2005
ORDER
This is a diversity suit brought by QSI-Fostoria DC, LLC (QSI) against General Electric Capital Business Asset Funding Corporation (GE Capital) to recover damages for GE Capital's failure to remove equipment from a building that QSI had leased to Quality Farm and Fleet (Quality) for use as a distribution center.
Pending is plaintiff-intervenor's, BACM 2001-1 Central Park West, LLC's (BACM), motion for a temporary restraining order, preliminary injunction, and permanent injunction. The purpose of the motions is to compel GE Capital, in the event it and QSI settle this case with payment of damages by GE Capital to QSI, to pay the settlement funds into an interest-bearing account controlled by the court. For the following reasons, BACM's motion shall be denied.
Background
QSI leased a building to Quality for use as a distribution center. To finance its purchase of the building, QSI obtained a loan from and gave a mortgage to Bridger Commercial Funding, LLC (Bridger).The tenant, Quality, leased a material handling system from defendant GE Capital. As part of its arrangement with Quality, GE Capital required the landlord, QSI, to enter into a Landlord Waiver and Agreement (Landlord Agreement).
Quality's business was not successful, and it filed bankruptcy. Thereafter, pursuant to its Landlord Agreement with GE Capital, QSI served notice on GE Capital to remove its equipment from QSI's building. GE Capital did not remove the equipment for more than a year. According to QSI, such failure made the premises unrentable to another tenant.
Not receiving rental income from either Quality or a successor tenant, QSI defaulted on the note and mortgage it had given to Bridger. Bridger, in the meantime, had transferred QSI's note and mortgage to BACM. Rather than foreclose on the QSI premises, BACM took a deed in lieu of foreclosure. Thereafter, BACM sold the premises to a third party.
Sometime before QSI had given the deed in lieu of foreclosure to BACM, QSI had brought this suit to recover damages QSI had incurred due to GE Capital's failure to have removed the equipment from QSI's premises. QSI's complaint sought declaratory and injunctive relief to compel GE Capital to remove the equipment. QSI also asserted three claims for monetary damages: 1) breach of the Landlord Agreement; 2) unjust enrichment; and 3) trespass. Subsequent removal by GE Capital of the equipment mooted the claims for declaratory and injunctive relief.
According to BACM, it did not learn of the pendency of this litigation and QSI's claim for monetary damages against GE Capital until after it had received QSI's deed in lieu of foreclosure. BACM claims that, as a result of certain terms and conditions of the Deed in Lieu of Foreclosure Agreement (Deed in Lieu Agreement), it, not QSI, is entitled to recover on those claims.
In essence, BACM contends that the Deed In Lieu Agreement included an assignment of QSI's claims from QSI to BACM. QSI disagrees, and contends that the Deed in Lieu Agreement, which does not expressly mention the claims against GE Capital, did not transfer those claims to BACM.
In an order dated August 17, 2004, I agreed with QSI that the Deed in Lieu Agreement did not transfer its claim against GE Capital to BACM. In addition, I granted leave for BACM to amend its amended and supplemental complaint by filing cross claims against QSI. In its complaint, BACM alleges seven cross-claims against QSI: 1) breach of the obligation in the Deed In Lieu Agreement to transfer the claim against GE Capital to BACM; 2) breach of a promise in the Deed In Lieu Agreement to deliver all real and personal property to BACM; 3) reformation of the Deed in Lieu Agreement to convey the claim against GE Capital; 4) fraudulent misrepresentation that the Deed in Lieu Agreement was conveying all property, including the claim against GE Capital; 5) action on QSI's original mortgage to Bridger, which gave QSI a revocable license to recover on the claim against GE Capital, with automatic revocation of the license if QSI defaulted on the underlying note; 6) a claim based on a security interest in the mortgage; and 7) a claim relating to a satisfaction of mortgage filed by BACM when it sold the premises.
This claim is moot in light of my August 17, 2004, order.
In its pending motions, BACM contends that GE Capital and QSI are close to settling QSI's monetary claims against GE Capital, and that such a settlement would involve GE Capital paying a substantial sum of money to QSI. (Doc. 102, Exhibit A, at 2.) Fearing dissipation of the settlement proceeds before its claims to be entitled to any recovery from GE Capital can be adjudicated, BACM wants those proceeds to be deposited with the court, rather then being paid to QSI.
Discussion
QSI contends that BACM is not entitled to injunctive relief because: 1) BACM's motion is tantamount to a request for prejudgment attachment under Ohio Revised Code § 2715.01 et seq., and BACM cannot meet the burden of proof under the statute; 2) decisions by the Supreme Court bar this court from granting the type of injunctive relief sought by BACM; and 3) BACM cannot satisfy the requirements for a preliminary injunction.
1. Ohio's Prejudgment Attachment Statute
QSI argues that BACM's motion should be treated as a motion for attachment and thus denied because BACM cannot meet the requirements of Ohio's prejudgment attachment statute.
The Sixth Circuit discussed the relationship between attachment under Rule 64 of the Federal Rules of Civil Procedure and injunctions under Rule 65 in Ebsco Indus., Inc. v. Lilly, 840 F.2d 333 (6th Cir. 1988). Addressing whether a district court may use its injunctive powers under Rule 65 instead of its attachment authority under Rule 64 to preserve assets prior to trial or judgment, the court held that "a preliminary injunction may not be granted unless there are valid findings that the legal remedy provided by the state's attachment statutes under Rule 64 is inadequate." Id. at 336.
"An adequate remedy at law," the Sixth Circuit has stated, "is a remedy that is plain and complete and as practical and efficient to the ends of justice as the remedy in equity by injunction." USACO Coal Co. v. Carbomin Energy, Inc., 689 F.2d 94, 99 (6th Cir. 1982).
Rule 64 of the Federal Rules of Civil Procedure governs attachment and dictates that provisional remedies are available only under the circumstances and in the manner provided by the law of the state in which the federal court is located. Fed.R.Civ.P. 64. Thus, Ohio's prejudgment attachment statute, O.R.C. § 2715.01 et seq., governs the remedies available to BACM.
BACM claims that Ohio's attachment statute fails to provide an adequate remedy because it cannot meet the requirements of O.R.C. § 2715.03 that it describe the property and state its location. This is so, BACM argues, because, at the present time, a separate settlement fund has not been created.
BACM also argues that Ohio's attachment statute does not apply to property located outside Ohio. According to BACM, the settlement funds will likely come from GE Capital, a Delaware corporation with its principal place of business in Washington.
As to BACM's first argument, I find that BACM is able to describe the property to comply with Ohio's attachment statute. "The debt owed by GE Capital to QSI," or "any settlement proceeds received by QSI from GE Capital" is a sufficient description.
BACM's second argument is also not persuasive. Ohio law distinguishes between a debt and tangible goods in the context of attachment or garnishment proceedings. For garnishment purposes, "a debt has no fixed situs and may be reached in any jurisdiction in which the person owing it may be found and served with summons, if the person to whom the debt was due could sue his debtor therefore in that jurisdiction." Ohio Loan Discount Co. v. Siemen, 142 Ohio St. 384, 386-87 (1943). However, tangible personal property of the defendant which is located outside the state cannot be reached by attachment proceedings. Id.
In this case, BACM seeks to attach a debt owed by GE Capital to QSI. Because a debt has no fixed situs, and GE Capital has not raised an objection to jurisdiction by this court, Ohio's attachment statute can reach this property.
While BACM has not convinced me that Ohio's attachment statute fails to provide an adequate remedy that would justify me awarding preliminary injunctive relief, I will address the alternative grounds for denying BACM's motion.
2. Supreme Court Precedent
Assuming that Ohio's attachment statute fails to provide an adequate remedy, QSI next contends that based on Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999), this Court lacks authority to issue a preliminary injunction which effectively acts as a prejudgment attachment.
In DeBeers Consol. Mines, Ltd. v. United States, 325 U.S. 212, 220 (1945), the Supreme Court confirmed the general principle that "a preliminary injunction is always appropriate to grant intermediate relief of the same character as that which may be granted finally." See also USACO Coal, 689 F.2d at 97.
In Grupo, however, the Supreme Court answered the narrower question of "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." Id. at 310. The Court reasoned that historically, a court of equity could not issue such provisional relief in the context of an action for money damages. Id. at 1968-69 (noting the "general rule that a judgment establishing the debt was necessary before a court of equity would interfere with the debtor's use of his property").The Court struck down the injunction. Id. at 333.
The Court explained the considerations against the creation of injunctive relief:
"A rule of procedure which allowed any prowling creditor, before his claim was definitely established by judgment, and without reference to the character of his demand, to file a bill to discover assets, or to impeach transfers, or interfere with the business affairs of the alleged debtor, would manifestly be susceptible of the grossest abuse. A more powerful weapon of oppression could not be placed at the disposal of unscrupulous litigants." (quoting Wait, Fraudulent Conveyances, § 73, at 110-111).
The requirement that the creditor obtain a prior judgment is a fundamental protection in debtor-creditor law. . . . There are other factors which likewise give us pause: The remedy sought here could render Federal Rule of Civil Procedure 64, which authorizes use of state prejudgment remedies, a virtual irrelevance. Why go through the trouble of complying with local attachment and garnishment statutes when this all-purpose prejudgment injunction is available? More importantly, by adding, through judicial fiat, a new and powerful weapon to the creditor's arsenal, the new rule could radically alter the balance between debtor's and creditor's rights which has been developed over centuries through many laws — including those relating to bankruptcy, fraudulent conveyances, and preferences. Because any rational creditor would want to protect his investment, such a remedy might induce creditors to engage in a "race to the courthouse" in cases involving insolvent or near-insolvent debtors, which might prove financially fatal to the struggling debtor.Id. at 330-331.
The Court, however, distinguished cases in which a plaintiff seeks equitable relief. Id. at 324-25. See e.g., Deckert v. Independence Shares Corp., 311 U.S. 282, 290 (1940) (upholding a preliminary injunction that prevented a party from transferring assets as "a reasonable measure to preserve the status quo pending final determination of the questions raised by the bill" where the complaint stated claims for equitable relief (namely, rescission of contract and restitution)). In discussing Deckert, the Court stated:
Deckert is not on point here because, as the Court took pains to explain, "the bill stated a cause [of action] for equitable relief." . . . The preliminary relief available in a suit seeking equitable relief has nothing to do with the preliminary relief available to a creditor's bill seeking equitable assistance in the collection of a legal debt.Id. at 325 (quoting Deckert, 311 U.S. at 288).
BACM has asserted claims for both money damages and equitable relief. Pursuant to Grupo, I cannot issue the injunction on BACM's claims for money damages, which are based on alleged breaches of contract and the mortgage (i.e., Counts 1, 2, 5, 6, and 7). I have the power, however, to issue an injunction on BACM's claims for equitable relief (i.e., Counts 3 and 4).
BACM also contends that its claims seeking a declaratory judgment (i.e., Claims 5, 6, and 7) are "equitable claims." BACM's argument is meritless. Actions for declaratory judgment are neither legal nor equitable claims, but are considered to be sui generis. Sanders v. Louisville N.R. Co., 144 F.2d 485, 486 (6th Cir. 1944) (citing Great Northern Life Ins. Co. v. Vince, 118 F.2d 232, 233-34 (6th Cir. 1941)).
A claim for declaratory judgment, moreover, cannot stand on its own, but rather the request for declaratory judgment must accompany the substantive claim for which the declaratory judgment is sought. Days Inn Worldwide, Inc. v. Sai Baba, Inc., 300 F. Supp. 2d 583, 593 (N.D. Ohio 2004) (citing Int'l Ass'n of Machinists and Aerospace Workers v. Tennessee Valley Auth., 108 F.3d 658, 668 (6th Cir. 1997) ("a declaratory judgment action is a procedural device used to vindicate substantive rights").
Each of BACM's requests for declaratory judgment is linked to an underlying substantive claim based in contract, and thus, not only are these declaratory judgment requests not "equitable," it is also impossible for them to stand alone.
3. Preliminary Injunction Analysis
The purpose of a preliminary injunction is to determine whether sufficient evidence supports awarding preliminary equitable relief. See Adams v. Fed. Express Corp., 547 F.2d 319 (6th Cir. 1976). In deciding whether to issue a preliminary injunction, a district court must consider four factors: 1) whether the moving party has a strong likelihood of success on the merits; 2) whether the moving party will suffer irreparable injury without the injunction; 3) whether the issuance of the injunction would cause substantial harm to others; and 4) whether the public interest would be served by issuance of the injunction. E.g., Nat'l Hockey League Players' Ass'n v. Plymouth Whalers Hockey Club, 325 F.3d 712, 717 (6th Cir. 2003) (citing Nightclubs, Inc. v. City of Paducah, 202 F.3d 884, 888 (6th Cir. 2000)).
These four considerations are factors to be balanced, not prerequisites that must be met. Id. (citing In re DeLorean Motor Co., 755 F.2d 1223, 1229 (6th Cir. 1985)). A district court is not required to make findings concerning each of the four factors if fewer factors are determinative of the issue. Id.
a. Likelihood of Success on the Merits i. Reformation
In Count 3, BACM seeks to have the Deed in Lieu Agreement reformed to convey the claim against GE Capital. Reformation is a remedy by which a writing is corrected to express the agreement the parties originally intended to express. Castle v. Daniels, 16 Ohio App.3d 209, 212 (1984). Under Ohio law, reformation is generally available on the grounds of either mutual mistake or fraud. Wagner v. National Fire Ins. Co., 132 Ohio St. 405, 412 (1937); Kungle v. Equitable Gen. Ins. Co., 27 Ohio App.3d 203 (1985).Ohio courts define mutual mistake as "the mistake of all parties to the contract." Wagner, 132 Ohio St. at 412. While in such cases "equity affords . . . reformation in order to make the writing conform to the real intention of the parties," equity "will never make a new contract for those who executed the writing sought to be reformed." Id.
Reformation, accordingly, involves a two-step inquiry: 1) whether there was a mutual mistake; and 2) if so, what the parties mutually intended. Cigna Ins. Co. v. Cooper Tire Rubber, Inc., 180 F. Supp. 2d 933, 935 (N.D. Ohio 2001).
Mutual mistake must be proved by clear and convincing evidence. Id. (citing Stewart v. Gordon, 60 Ohio St. 170, syllabus (1899)).
To warrant reformation in this case, BACM must show that it and QSI made the same mistake as to whether the Deed in Lieu Agreement conveyed the claim against GE capital to BACM. Presently, the facts of record do not, however, present a case of mutual mistake. While BACM may have intended the monetary claim to be included in the agreement, there is no direct evidence that QSI shared that intent. BACM has not shown a likelihood of prevailing on the merits of its reformation claim of mutual mistake.
BACM may also obtain a reformation based on fraud. As discussed infra in more detail with regard to BACM's separate fraud claim, the present record does not reveal any evidence of fraudulent intent by QSI.
ii. Fraud
In its fraud claim, BACM contends that QSI falsely represented that it was delivering all QSI's property, including the claim against GE Capital, via the Deed In Lieu Agreement.Fraud requires proof of: 1) a representation or, where there is a duty to disclose, concealment of a fact; 2) which is material to the transaction at hand; 3) made falsely, with knowledge of its falsity, or with such utter disregard and recklessness as to whether it is true or false that knowledge may be inferred; 4) with the intent of misleading another into relying on it: 5) justifiable reliance on the representation or concealment; and 6) a resulting injury proximately caused by the reliance. Williams v. Aetna Fin. Co, 83 Ohio St.3d 464, 475 (1998).
BACM has yet to present evidence that QSI acted with any intent to mislead BACM. Absent some evidence that QSI acted with fraudulent intent when it promised to deliver all its property to BACM, BACM has not demonstrated a likelihood of success on the merits of this claim.
b. Irreparable Harm
The Sixth Circuit has recognized that "a plaintiff's harm is not irreparable if it is fully compensable by money damages." Basicomputer Corp. v. Scott, 973 F.2d 507, 511 (6th Cir. 1992).
BACM contends it will suffer irreparable harm if the settlement monies it receives from GE Capital are not paid into escrow. BACM argues that QSI plans to distribute the funds to its member-owners and thereby leave QSI as "an empty, no-asset entity." (Doc. 102, at 20.)
While the inability to collect a money judgment may support a finding of irreparable harm in some circumstances, I do not find irreparable harm in this case. Even if QSI distributes the settlement monies to its members, BACM has presented no evidence that QSI is insolvent. Moreover, if QSI was to deliberately become an insolvent, "empty, no-asset entity," BACM has the ability to pursue an action to "pierce the corporate veil" and may recover funds improperly distributed to QSI's members. This factor supports denying the injunction.
c. Balancing of Harms
BACM contends that any judgment it may obtain against QSI may eventually become worthless if the settlement funds are not paid into escrow, and that depositing such funds into a court-controlled escrow account would not harm either QSI or GE Capital.
QSI argues that BACM's motion serves as an impediment to resolution of the original dispute between GE Capital and QSI. "The very possibility of the issuance of an injunction compelling that any settlement funds be escrowed, has effectively stalled settlement talks." (Doc. 107, at 12.)
QSI also maintains that its owner-members may suffer tax ramifications as a result of the requested injunction. QSI contends that because an Ohio limited liability company, such as QSI, is taxed as a partnership, its members would be required to report the settlement proceeds as income on payment, even if the funds were paid into escrow. This, QSI contends, would result in significant obligations that would have to be satisfied from other financial sources.
Even if QSI's contention as to the tax ramifications is not correct, I believe that the balance of harms still tips in favor of denying the injunction. The proposed settlement between GE Capital and QSI contemplates QSI's use of the money. To force the payment of such funds into escrow deprives QSI of the benefit of its settlement bargain with GE Capital.
BACM, moreover, has not sufficiently demonstrated that any judgment it may receive against QSI would be uncollectible. Even if QSI distributes the settlement monies to its members, BACM has presented no evidence that QSI is insolvent. I am loathe to grant BACM an injunction based on its speculation that it will be unable to collect if it obtains a judgment in its favor. This factor, too, favors denying relief.
As the Supreme Court noted in DeBeers, 325 U.S. at 222-223:
To sustain the challenged order would create a precedent of sweeping effect. This suit, as we have said, is not to be distinguished from any other suit in equity. What applies to it applies to all such. Every suitor who resorts to chancery for any sort of relief by injunction may, on a mere statement of belief that the defendant can easily make away with or transport his money or goods, impose an injunction on him, indefinite in duration, disabling him to use so much of his funds or property as the court deems necessary for security or compliance with its possible decree. And, if so, it is difficult to see why a plaintiff in any action for a personal judgment in tort or contract may not, also, apply to the chancellor for a so-called injunction sequestrating his opponent's assets pending recovery and satisfaction of a judgment in such a law action. No relief of this character has been thought justified in the long history of equity jurisprudence.
d. Public Interest
The public has little, if any, interest in this dispute. In any event, the public interest is most favored by encouraging settlement. The public interest is also furthered by upholding Ohio's prejudgment attachment statute.
Conclusion
The balance of all factors disfavors granting the preliminary injunction requested.
It is, therefore,
ORDERED THAT the motion of BACM 2001-1 Central Park West LLC for a temporary restraining order, preliminary injunction, and permanent injunction, be and the same hereby is denied.
So ordered.