We use cookies to customise content for your subscription and for analytics.
If you continue to browse the International Law Office website, we will assume you are happy to receive all of our cookies. For further information please read our Cookie Policy.

Supreme Court Rules Against Mareva Injunctions - International Law Office

International Law Office

Insolvency & Restructuring - USA

Supreme Court Rules Against Mareva Injunctions

November 30 1999

The Facts
The Supreme Court's Analysis
The Dissenters' View
Effect of the Decision

In Grupo Mexicano de Desarrollo v Alliance Bond Fund [119 S Ct 1961 (1999)], the US Supreme Court considered whether a federal district court had the power to issue a preliminary injunction preventing the defendant, an alleged debtor, from transferring assets in which no lien or equitable interest was claimed by the plaintiff-creditor. The court decided, by a slim majority, that the federal courts lacked such power.

In contrast, the English courts have taken the opposite view, holding that they have the power to enjoin pre-judgment asset transfers through what has become known as a 'Mareva injunction'.(1)

The Facts

Grupo Mexicano de Desarrolo (GMD), a Mexican holding company, issued $250 million of unsecured notes, which had equal priority of payment to all of GMD's other unsecured debt. GMD was involved in a toll road construction programme sponsored by the Mexican government. In response to problems arising in the Mexican economy, the Mexican government announced the Toll Road Rescue Programme, under which it would issue guaranteed toll road notes to, and pay outstanding receivables held by, GMD and others for services connected with the construction.

In 1997 GMD had announced that it expected to receive approximately $309 million in toll road notes. Despite the amount it expected from the government, GMD remained in serious financial trouble. As a result, it defaulted on the interest payments on its unsecured notes. In an effort to clear some of its debts, GMD began dispersing its rights in connection with the toll road notes to certain Mexican creditors, including employees and the Mexican government (which was apparently owed back taxes).

To prevent the complete dissipation of the company's remaining assets, certain holders of GMD's unsecured notes commenced an action in New York District Court seeking breach of contract damages and, in view of GMD's precarious financial condition, a preliminary injunction restraining GMD from transferring the toll road notes.

Concluding that GMD had no plausible defences, the district court entered a preliminary injunction barring GMD from dissipating or otherwise transferring its rights in the toll road notes. The Second Circuit Court of Appeals affirmed, and GMD appealed the preliminary injunction to the Supreme Court.(2)

The Supreme Court's Analysis

Pursuant to the Judiciary Act of 1789, federal district courts are vested with jurisdiction over "all suits in equity". The Supreme Court's analysis turned on the scope and breadth of this equity power: Does the federal courts' equity power include the power to enter a pre-judgment injunction prohibiting the defendant from transferring assets pending the entry of a final judgment(3) on the merits of the claim?

In analyzing this question, the majority adopted a static view of equity, asking whether English courts in 1789 (the time of the adoption of the Judiciary Act) recognized pre-judgment injunctions of this type. Because English courts did not recognize such relief in equity until 1975, the majority concluded that equity does not encompass the power to enter pre-judgment injunctions to prevent the dissipation of assets, and overturned the injunction. In the majority's view, whether permitting a creditor to obtain a pre-judgment injunction to prevent a debtor's dissipation of assets is favourable or desirable is irrelevant and is more appropriately left to the legislative process.

The court stated:

"…because such a remedy was historically unavailable from a court of equity, [the majority of the Supreme Court held] that the district court had no authority to issue a preliminary injunction preventing [debtors] from disposing of their assets pending adjudication of [a creditor's] contract claim for monetary damages."(4)

The Dissenters' View

The dissenters believed a more flexible approach for defining the scope of equity was appropriate. Rather than focusing on what English courts did in 1789, they believed that it was more important to recognize the fundamental principles underlying notions of equity.(5)

The dissenters noted that in 1789 capital was slow moving and comparatively immobile. As such, the relief in question would not be a necessary part of the equity arsenal at that time. However, in the modern era, technology and international economic development had increased the mobility of capital and enabled debtors to instantaneously transfer assets abroad to avoid judgments.(6) As a consequence, more expansive powers are needed to protect creditors' interests fairly.

Effect of the Decision

As a consequence of the Supreme Court's decision, even creditors who have an uncontested claim on the merits will have little ability to protect themselves if a debtor is likely to dissipate its only assets. The only realistic option for a creditor to prevent this is to file an involuntary bankruptcy petition against the debtor.(7)

For further information on this topic please contact Arthur Steinberg or Benjamin Mintz at Kaye, Scholer, Fierman, Hays & Handler, LLP by telephone (+1 212 836 8000) or by fax (+1 212 836 8689) or by e-mail (asteinberg@kayescholer.com or bmintz@kayescholer.com).


(1) The name derives from the 1975 case of Mareva Compania Naviera v International
[SA, 2 Lloyds Rep 509], in which the court concluded that it had jurisdiction to prevent
a debtor from disposing of its assets. Previous English decisions had generally concluded that a court had no power to protect a creditor pre-judgment. The Mareva injunction has now been confirmed by English statute.

(2) The United States supported the note-holders as amicus curiae in an attempt to uphold the injunction.

(3) Under American law, equity does recognize the right of a judgment creditor to obtain a preliminary injunction to prevent a debtor's dissipation of assets.

(4) Grupo Mexicano, 119 S Ct at 1975.

(5) The dissent noted several other cases in other contexts in which the Supreme Court had
approved equitable remedies that were not available in 1789.

(6) Grupo Mexicano, 119 S Ct at 1977 ("Moreover, increasingly sophisticated foreign-haven judgment proofing strategies, coupled with technology that permits the nearly instantaneous transfer of assets abroad, suggests that defendants may succeed in avoiding meritorious claims in ways unimaginable before the merger of law and equity").

(7) See 11 USC Section 303. Unless the debtor has fewer than 12 creditors, at least three creditors holding undisputed claims aggregating $10,775 are required to file an involuntary petition against a debtor.
The materials contained on this web site are for general information purposes only and are subject to the disclaimer.

Comment or question for author

ILO provides online commentaries as specialist Legal Newsletters. Written in collaboration with over 500 of the world's leading experts and covering more than 100 jurisdictions, it delivers individually requested information via email to an influential global audience of law firm partners and international corporate counsel. Please click here to register for the service.

The materials contained on this website are for general information purposes only and are subject to the disclaimer.

ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.