- Guarantor’s Sale of Pledged Assets Warrants Freezing of Additional Assets
- April 19, 2012
- Law Firm: Lerch Early Brewer Chartered - Bethesda Office
A federal district court in Texas recently held that a guarantor’s dissipation of pledged assets warranted injunctive relief because the lender had shown a substantial likelihood that at the close of litigation the guarantor would have insufficient assets to satisfy a monetary award.
In May 2008, Amegy Bank National Association made a $15 million loan to Monarch Flight II, LLC. The sole owner and managing member of Monarch, William B. Johnson, entered into a guaranty agreement and a security agreement with Amegy. In the security agreement, Johnson granted Amegy a security interest in more than 800,000 Host Hotels & Resorts, L.P. partnership units he owned and in any shares of Host Hotels & Resorts, Inc. that he would own if he redeemed the partnership units. In the agreement Johnson “represented and warranted that he owned the partnership units ‘free and clear of any lien, security interest, pledge, claim or other encumbrance...or any right or option on the part of a third person to purchase or otherwise acquire’ them.” A week prior to signing the agreement, Johnson sent a letter to Amegy stating that while he did not currently want to dispose of the partnership units, when he did dispose of them, he would use the proceeds to pay off half of the loan balance. The security agreement did not reflect this condition and instead stated that Johnson, “would not ‘sell, assign, convey, pledge or otherwise dispose’ of the units and shares without Amegy’s ‘prior written consent.’”
In 2009, Monarch was late on interest payments on the loan from Amegy. In response, and in accordance with the terms of the promissory note, Amegy requested that Monarch prepay half of the principal of the loan. Johnson exercised his right to redeem the partnership units he had pledged as security (and also redeemed additional units), but did not inform Amegy that he was selling his partnership units and he did not use the $9,516,052.12 proceeds to pay off 50% of the loan balance.
In May 2011, the loan matured and Monarch failed to pay the outstanding principal balance and accrued interest. Amegy attempted to foreclose on the partnership units but it was unable to do so because Johnson had already sold them. Amegy filed suit against Johnson (and others) seeking to recover the outstanding principal and interest due under the promissory note. Amegy alleged five different causes of action ranging from breach of contract to conspiracy. Amegy also applied for a preliminary injunction requesting that the court freeze “three types of assets: (1) all of Johnson’s assets; (2) all assets that, according to Amegy, are subject to a constructive trust; and (3) ‘all assets belonging to or in the possession of... Johnson or subject to his control having a current total value, net of any lien or encumbrances, of $16,000,000.’” Johnson opposed the injunction and argued that Amegy had an adequate remedy at law, money damages, because he, and the entities he owned, controlled assets worth substantially more than $15 million.
Courts have described a preliminary injunction as an “extraordinary remedy” that is granted only when the party seeking it demonstrates: “(1) a substantial likelihood of success on the merits; (2) a substantial threat that it will suffer irreparable harm if the injunction is not granted; (3) that the threatened injury outweighs any damage the injunction might cause the defendant; and (4) that the injunction will not disserve the public interest.”
For the purposes of the preliminary injunction hearing, the parties made various stipulations leaving the issue of irreparable harm as the only element in dispute. The court explained that irreparable harm is found when law cannot provide an adequate remedy. It further explained that, “[e]ven when, as here, the ultimate relief sought is money damages, ‘extraordinary circumstances’ - such as evidence showing that the defendant is likely to become insolvent before final judgment or that the defendant intends to dissipate his assets to make a judgment awarding damages uncollectible - ‘may give rise to the irreparable harm required for a preliminary injunction.’”
At the initial injunction hearing in October, the court denied Amegy’s motion for a preliminary injunction. The motion was denied primarily as a result of the court’s erroneous belief that Johnson was planning on borrowing $28 million to complete a development project, when, as the motion for reconsideration correctly stated, the actual amount was $200 million.
On the motion for reconsideration, the court found Amegy met its burden to demonstrate irreparable harm because it showed that it was likely Johnson would have insufficient resources at the conclusion of the litigation to satisfy an award of money damages. The court stated that if Johnson further encumbered the property he own[ed} “by $200 million-the amount he [was] trying to borrow to complete the real estate development in the Bahamas -Johnson’s equity in the assets shown in the record...[would] be less than needed to satisfy a money judgment for Amegy.” As a result of the injunction, Johnson could not transfer, sell or further encumber the real properties that were improved or benefited from the proceeds of the partnership units sale.
This case is cited as Amegy Bank Nat’l Ass’n v. Monarch Flight II, LLC, 2011 WL 6091807 (S.D. Tex. 2011).