5-4 ruling a major blow to creditors

Federal judges can't freeze available assets of firm in debt

Supreme Court

June 18, 1999|By Lyle Denniston | Lyle Denniston,SUN NATIONAL STAFF

WASHINGTON -- The Supreme Court, in a major setback for creditors, ruled 5-4 yesterday that federal judges may not freeze the available assets of a company that is in debt to make sure it can pay off if it loses a case in court.

If a company's assets are not pledged to anyone as security, the majority decided, a federal judge cannot stop the company from using those assets to pay off favored creditors, rather than holding the property until the court case is decided.

A creditor who has sued over a debt but has not yet won the case, the majority said, has no right to have a court freeze the debtor's property in the meantime -- even if the creditor's claim is so strong that it almost surely will win in court and even if a victory would turn out to be worthless without a freeze.

The ruling produced an unusually spirited disagreement among the justices over an issue of arcane court procedure. Two former law professors on the court -- Justices Ruth Bader Ginsburg and Antonin Scalia -- disagreed animatedly over a legal fine point, with Ginsburg reading from her dissent after Scalia had finished speaking for the majority.

Because the majority relied upon English law established before 1789, when the U.S. Constitution went into effect and federal courts were created, Ginsburg complained that "old ways hold sway." She said Britain itself changed its law to allow creditors to obtain freeze orders during lawsuits, and that other countries had followed suit.

"Today's technology facilitates the near instantaneous transfer of assets here and abroad, enabling borrowers to escape meritorious claims," the dissenters argued.

The majority, though, concluded that the remedy of freeze orders to protect claims still pending in court has never been a part of U.S. law, and "we have no authority to craft a `nuclear weapon' of the law like the one advocated here."

It is up to Congress, not the Supreme Court, Scalia declared, to give federal courts the power to freeze company assets, if it wishes.

The ruling grew out of a dispute over the right of U.S. investors to collect from a Mexican road-building company compensation for about $75 million of now-worthless notes that the company, Grupo Mexicano de Desarrollo, had issued.

The investors sued after the financially troubled company stopped paying interest on the notes.

Learning that the company was using its available assets to pay off debts it owed to others outside the United States, the U.S. investors obtained an order from a federal judge in New York to freeze the company's available assets.

Yesterday's Supreme Court leaves under a cloud a courtroom victory that the U.S. investors later won over the company in the New York federal court.

Pub Date: 6/18/99

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