Enjoining a Fund Distribution Pending the Outcome of Litigation

A Specific and Identifiable Fund of Money
In Martin v. First Federal Savings & Loan Association, 559 So. 2d 1075 (Ala. 1990), First Federal, a mortgage lender, entered into an agreement with C&C Land Corp., a servicing company, to purchase mortgage loans from C&C. Under that agreement, C&C agreed to collect the borrowers’ payments, hold the funds in trust, take a small commission, and then send the balance of the funds to First Federal each month.

First Federal learned that C&C was having financial difficulties. It also discovered discrepancies in First Federal's legal position as the first mortgage holder and of C&C's failure to hold the mortgage payments in trust for First Federal. First Federal terminated the servicing agreement and notified its mortgagors to make all future mortgage payments directly to First Federal. When the mortgagors contacted C&C to determine whether to make payments to C&C or to First Federal, C&C instructed the borrowers to disregard First Federal’s letter and to continue remitting their payments directly to C&C.

First Federal filed suit and sought the entry of a temporary restraining order and preliminary injunction. After a hearing on First Federal’s request for a preliminary injunction, the court found that C&C had deliberately converted to its own use monies that were due to be paid to First Federal and had actively engaged in conduct that frustrated First Federal’s rights under the servicing agreement. The trial court frankly stated that its reason for entering the preliminary injunction was “to accomplish what in street terms is called ‘stopping the bleeding.’” Id. at 1077. The trial court enjoined C&C from interfering with First Federal’s attempts to collect mortgage payments directly, and, notably, from “failing to deliver to [First Federal] any monies in possession of any of the Defendants which have been collected by the Defendants on mortgages sold by the Defendants, or any of them to [First Federal].”

On appeal, the Alabama Supreme Court upheld the trial court’s injunction. The court noted that First Federal presented evidence that it would be irreparably harmed by (1) C&C’s continued conversion of funds due to First Federal; (2) C&C’s interference with First Federal’s efforts to collect the mortgage payments directly; and (3) C&C’s poor financial condition. Given the combination of these facts, the court found that the trial court was not plainly erroneous, and it declined to dissolve the injunction.

Florida courts have considered a very similar case. In Georgia Banking Co. v. GMC Lending & Mortgage Services, Corp., 923 So. 2d 1224 (Fla. 3d Dist. 2006), Georgia Banking purchased from GMC residential mortgage loans that GMC originated. GMC continued to act as the servicer on behalf of Georgia Banking, and under its agreement with Georgia Banking, GMC was to collect the mortgage payments and other monies due from the borrowers and hold the funds in trust for Georgia Banking. The bank sued GMC for approximately $426,000 that it alleged GMC held in trust for Georgia Banking at Wachovia Bank, and it obtained a preliminary injunction that prevented GMC from transferring any of the funds from the Wachovia accounts. GMC objected, arguing that Georgia Banking essentially stated a claim for breach of contract, which could be satisfied by a money judgment. The trial court dissolved the injunction.

On appeal, the court rejected GMC’s argument that the potential recovery of a money judgment rendered injunctive relief inappropriate, and it reinstated the injunction. The court noted that Georgia Banking claimed that there existed specific, identifiable trust funds that GMC refused to turn over to Georgia Banking. Under those circumstances, the court found that injunctive relief was appropriate to prevent the dissipation of the specific fund.

Thus, where your client can identify a particular fund of money (as opposed to a particular sum of money, such as in cases for breach of a promise to pay), you may have a basis for asking the court to enjoin distribution of that fund—to preserve the status quo—pending the outcome of the litigation.

Constructive Trust or Other Equitable Relief
In Castillo v. Castillo, 701 So. 2d 1198 (Fla. 3d Dist. 1997), the court affirmed the trial court’s entry of an injunction that prevented the disbursal of a $200,000 fund. In Castillo, the plaintiff alleged that she had written a $200,000 check to her son based on their understanding that he would purchase a certificate of deposit in the names of the plaintiff and all her surviving children. Instead, the son established a $200,000 account in his name alone. The plaintiff sought, among other things, the imposition of a constructive trust. The court found that this fact distinguished the injunction from one that merely sought to preserve a defendant’s funds for later execution. In so holding, the court reaffirmed the availability of injunctive relief to protect the res of a trust implied by operation of law.

Likewise, in Blecher v. Dreyfus Brokerage Services, Inc., 770 So. 2d 1276 (Fla. 3d Dist. 2000), the court affirmed the trial court’s entry of an injunction freezing certain assets of the defendant. In Blecher, defendant E.K.U. opened a brokerage account with plaintiff Dreyfus Brokerage Services with $3,000 received from a foreign client. Two months later, 35,000 shares of American Financial Holdings stock, valued at approximately $400,000, were mistakenly transferred into E.K.U.’s account. E.K.U. assumed that these shares represented an additional investment by its foreign client, and it proceeded to sell the shares and then withdrew the proceeds from its account with Dreyfus. Dreyfus did not discover its mistake for another two months. Once it discovered its mistake, it demanded that E.K.U. refund the monies. E.K.U. refused, and Dreyfus filed suit, including a claim for the imposition of a constructive trust. The trial court entered an injunction freezing what remained of the proceeds withdrawn by E.K.U. On appeal, the court affirmed the injunction, again reasoning that injunctive relief is appropriate to protect the res in a claim for constructive trust.

In contrast, the Eleventh Circuit has vacated a trial court’s entry of a preliminary injunction freezing a defendant’s assets where the plaintiff ultimately seeks only money damages. See Noventa Ocho LLC v. PBD Properties LLC, 284 Fed. Appx. 726 (11th Cir. 2008). In Noventa, Noventa sought to recover a portion of a contractual purchase price still held by the defendants. Noventa requested, and the trial court granted, a preliminary injunction that required the defendants to pay approximately $1.2 million into the court’s registry, and alternatively froze certain assets of the defendants. Noventa sought only damages for fraudulent misrepresentation and breach of contract, and it did not seek injunctive or other equitable relief as a component of its main claim against the defendants. The Eleventh Circuit found this issue dispositive, holding that a district court lacks authority to freeze the assets of a defendant in a case where the plaintiff seeks only money damages. The court also noted that Noventa had an adequate remedy: to file suit for money damages, which Noventa had done. The court also found the injunction improper because there was not a specific, identifiable fund at issue. Even though Noventa identified a specific amount of money to which it claimed entitlement, that did not relieve it of the obligation to show the existence of a specific fund that could be the subject of an injunction.

In both Castillo and Blecher, the funds at issue were specific, identifiable sums of money to which the plaintiff claimed the defendant had no right. But the Florida courts appear particularly persuaded by the type of relief requested, rather than the source of the funds at issue. The Noventa court also focused on the type of relief requested by Noventa: Noventa’s failure to request some form of equitable relief acted almost as an admission that money damages would compensate it. Thus, from a practical standpoint, counsel should examine the type of relief requested in these cases. Assuming that a specific fund of money can be demonstrated, parties who seek to freeze assets of a defendant pending the final outcome of a case should strongly consider including a request for a constructive trust or other equitable relief. In fact, counsel may have a difficult time justifying an injunction (a requirement of which is the absence of an adequate remedy at law) where it seeks only money damages.

Keywords: business torts litigagion, injunction, disbursement, fund of money, constructive trust, equitable relief