Connecticut, like a number of other states, provides for prejudgment attachment of assets. A lender, for example, can seek to attach the assets of a borrower or guarantor before judgment is rendered, even, in some cases, without an advance hearing. A prejudgment remedy (“PJR”) allows a lender to attach assets of an obligated borrower or guarantor (an “obligated party”) in order to ensure that those assets remain available to satisfy any judgment ultimately rendered. Connecticut law provides three methods for obtaining a PJR, one of which is both powerful and very unusual.
Under the first method, the lender makes an application to the court, accompanied by an affidavit, proposed forms of order, and summons. The court then sets a hearing date (usually an initial status conference before a substantive hearing is set), and the borrower or guarantor (or both) is served. At the hearing, the obligated party can oppose the application. In order for the application to be granted, the court must determine that:
(a) There is probable cause that a judgment in the amount of the PJR sought or in an amount greater than the amount of the PJR sought, taking into account any defenses, counterclaims, or set-offs, will be rendered in the matter in favor of the plaintiff;
(b) Payment of any judgment that may be rendered against the defendant is not adequately secured by insurance; and
(c) The property sought to be subjected to the PJR is not exempt from execution.
If the court finds that the PJR should be granted, it may require that the lender post a bond to secure the defendant for damages that may result from issuance of the PJR or consider whether the defendant should be allowed to substitute a bond for the PJR. If granted, the lender can attach assets of the obligated party (real property, bank or securities accounts, equipment, accounts receivable, etc.) to prevent the obligated party from disposing or secreting them and to preserve its place in priority if the party grants consensual liens or other creditors attach assets in the meantime.
The court may also allow a PJR to be issued by the lender’s attorney without advance notice to the obligated party following submission of an affidavit setting forth facts sufficient to show that there is probable cause that a judgment in the amount of the PJR sought or in an amount greater than the amount of the PJR sought, taking into account any defenses, counterclaims, or set-offs, will be rendered in the matter in favor of the plaintiff and showing that the party against whom the PJR is sought either:
- Has hidden or will hide themselves so that process cannot be served on them;
- Is about to remove themselves or their property from this state;
- Is about to fraudulently dispose of or has fraudulently disposed of any of their property with intent to hinder, delay, or defraud their creditors; or
- Has fraudulently hidden or withheld money, property, or effects that should be liable to the satisfaction of the party’s debts.
Although the court issues the order, it is done without the obligated party having advance notice or an opportunity to be heard. The party whose assets have been attached is served after the attachment and may move to dissolve the PJR but, in the interim, has been prevented from secreting or transferring assets.
The third method, the secret sauce, is the most powerful (and unusual) tool available in Connecticut. If the loan documents contain the appropriate language, a lender in a commercial transaction can attach assets on an ex parte basis. The attorney for the lender can issue a writ of attachment and attach assets without first commencing a lawsuit; without advance notice to the party whose assets are being attached; and without a court order, a hearing, or any other judicial involvement. Under this mechanism, no demonstration of hiding or transferring assets is needed. Again, the party whose assets have been attached only finds out after the fact when they are served with the complaint and other attachment papers. The party whose assets have been attached may then move to dissolve the PJR, but at that point, its assets are already subject to the attachment.
In order for this third method to be available, the loan documents (e.g., note, credit agreement, guaranty) must contain an express waiver of the borrower’s or guarantor’s right to notice and a hearing before a PJR may be issued. It has become standard practice to include this waiver, usually including a waiver of the right to require a bond, in Connecticut commercial loan documents.
The treatment of PJRs in Connecticut is also fairly unique from an appellate perspective. First, in an exception to “normal” Connecticut procedure, an appeal does not automatically stay enforcement of a PJR order, although a judge has the power to stay this kind of order under certain circumstances. Further, the general timeline to appeal a decision (usually 20 days) is reduced for PJRs to seven days. These two facts mean that, unlike with other areas of Connecticut law, appeals have significantly less likelihood of interfering with the ultimate relief provided by these already-potent procedural devices.
The ability to attach the assets of a borrower or guarantor under a commercial loan without notice or any judicial involvement is a very powerful tool available to lenders in Connecticut that many out of state lenders are not aware of. To avail itself of this remedy, a lender must make sure at the time of loan origination that its loan documents contain the appropriate waiver language.
The Thought Leadership Committee of Barclay Damon’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area issues alerts and blogs on an ongoing basis to keep clients, colleagues, and friends up to date on important developments in the insolvency space. If you have any questions regarding the content of this alert, please contact the authors, Brian Rich, partner, at brich@barclaydamon.com, and Robert Wonneberger, Thought Leadership Committee chair, at rwonneberger@barclaydamon.com, or Janice Grubin or Jeff Dove, Restructuring, Bankruptcy & Creditors’ Rights Practices Area co-chairs, at jgrubin@barclaydamon.com and jdove@barclaydamon.com.