Winter 2007-09 Ex-parte attachment ruled to be valid

Number 66
Winter 2007

U.S. District Court

Ex-parte attachment ruled to be valid

Under certain circumstances a creditor may benefit from a court order to attach assets, without giving the debtor neither notice nor a hearing. Citibank v. Allied Management, 2006 U.S. Dist. LEXIS 93504.

The facts

Citibank, N.A. lent money to Lincoln Realty, Inc., and received guaranties from the borrower’s principals and related companies. In the loan papers Lincoln had agreed to give Citibank a participation in the rental income and sales proceeds of two buildings in the Hato Rey area of San Juan. Lincoln failed to pay, and Citibank sued for breach of contract.

Attachment

Without Lincoln knowing it, Citibank obtained a court order authorizing it to attach Lincoln and guarantor assets up to $4,454,827.66. It offered to post a bond for $222,741.38, which the court accepted. Citibank then proceeded to garnish several bank accounts belonging to the defendants.

The defendants in turn moved the judge to set aside the garnishments on the grounds that the order had been issued without either notice or hearing, as required by law.

Criteria

The District Court denied the defendants’ motion, although it did decide to schedule a hearing after the fact.

Because federal rules defer to the local jurisdiction’s in this area, the federal judge looked at Puerto Rico law and concluded that the general law is that no attachment order may be issued without prior notice and a hearing, except under limited instances, when the hearing may be held after the attachment has been effected. In order to trigger this situation, a plaintiff must show:

• an existing property interest on its part, on the asset to be attached, or
• the existence of extraordinary circumstances, or
• “a probability of prevailing on the merits, through the use of authentic documentary evidence which shows that there is a debt liquid, due, and payable.”

Property interest

The judge first ruled that Citibank did not have a prior property interest on the assets to be attached. That defendants had executed the guaranties before a notary public, and that the guaranties granted Citibank a right to apply to the payment of their obligations any money in which they had an interest, did not qualify. He quoted from the Puerto Rico Supreme Court case of Rivera Rodríguez v. Stowell, 133 D.P.R. 881 (1993), to the effect that a “property interest” exists “when one of the following occurs: mortgages, conditional sales, leasing, and the co-ownership situation that arises in cases involving judicial division of community assets.”

Extraordinary circumstances

Neither was Citibank able to show the presence of extraordinary circumstances meriting an ex-parte order.

Citibank claimed that some of the guarantor corporations had merged, consolidated or dissolved, but the court did not accept the argument. Extraordinary circumstances are those in which a defendant is going to transfer or encumber property so as to impair the possibility of executing an adverse judgment. The fact that five months later defendants acknowledged that two corporations merged did not meet the criteria.

Liquid debt

But Citibank’s credit was liquid, due and payable, and documentary evidence showed so, according to the judge. Citibank presented the sworn statement of a person who performed the mathematical computations to determine the amount of the debt claimed, and that was sufficient to comply with the third requirement. Once again the federal District Court reached to Puerto Rico courts, this time the Court of Appeals-Banco de Desarrollo Económico para PR v. Bay Tex Int’l Corp., 2004 WL 3199145. There the attachment order was based on:

• a sworn statement establishing the existence and balance of the debt,
• the loan document and
• a mortgage securing the debt.

The federal District Court found Citibank’s affidavit on the balance of the debt to be enough.

Subsequent hearing

A subsequent hearing was granted to the defendants because the judge found that the decisions of the Puerto Rico courts suggest that one is constitutionally mandated.

© 2007 Goldman Antonetti & Cordóva, LLC