In Massachusetts, the “reach and apply” equitable remedy is a powerful tool for creditors, especially when a debtor is obstructing payment. It allows a creditor to secure assets in the hands of third parties before obtaining a final judgment and then directly reach those assets once judgment is entered. However, a creditor must meet a demanding requirement to be entitled to relief. This alert provides an overview of this creditors’ rights tool and practical guidance to consider.
Reach and apply injunctions are allowed in Massachusetts under Massachusetts General Law Chapter 213 §§ 3(6)–(9), which is supported by robust and mostly creditor-friendly case law that provides a broad scope of instances to reach a debtor’s assets. Unlike traditional garnishments, which are often limited to wages or bank accounts, creditors using reach and apply injunctions can pursue:
- a debtor’s property as long as its value can be determined through a sale, appraisal, or standard court procedures even if it’s something that normally can’t be directly seized or taken in a lawsuit;
- a debtor’s accounts receivable (revenue) and trust interests;
- a debtor’s interest in a partnership as long as it does not disrupt the partnership’s business;
- a debtor’s shares or interest in corporations;
- property that the debtor gave away and/or bought or paid for but had the title put in someone else’s name to defeat, delay, or defraud the creditors; and
- a debtor’s insurance payments directly if the debtor’s insurance policy covers the judgment and has not been paid yet.
Since it can interfere with the debtor’s ability to generate revenue, the process to invoke a reach and apply injunction is a demanding one. Courts will not issue a generalized reach and apply injunction. Instead, a creditor must establish that it meets the requirements to be entitled to reach and apply a debtor’s property and identify the particular property (including the specific source of a debtor’s revenue) before the court will issue this type of injunction.
Specifically, a creditor must establish that (1) it has a valid debt or judgment against the debtor and (2) the debtor has a right to the property or money held by a third party in order to reach and apply the debtor’s property. In addition to showing the court that the debtor owes a certain sum to the creditor, a creditor should also be prepared to identify the contracts between the debtor and the third parties, invoices showing outstanding amounts, correspondence admitting the debt, financial statements showing expected revenue from the third party, or other documents evidencing a specific and definite obligation from a third party to the debtor.
Prior to judgment, in order to secure (or freeze) the debtor’s property or assets, the creditor must establish that (1) it has a likelihood of success of meeting these requirements, (2) the creditor will be irreparably harmed if the court does not secure the assets before judgment is determined, and (3) the balance of harms, if the assets are not secured, fall in the creditor’s favor. A creditor should be prepared to show the court that the creditor’s business’s viability depends on the payment from the debtor, the debtor intends to fraudulently convey its assets to avoid paying its debts, or some other reason that the creditor will not be able to obtain the debtor’s assets before judgment can be determined.
While the pursuit of a reach and apply injunction can be a rigorous and demanding exercise, its ultimate success can dramatically improve a creditor’s prospects for collection. Any serious analysis of pursuing recovery against a recalcitrant debtor should necessarily include this equitable remedy as a strategic and practical device.
The attorneys in Barclay Damon’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area can help you assemble the documents necessary and establish the requirements to be entitled to reach and apply a debtor’s assets to fulfill payment obligations that are owed to you.
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 author, Henry Gaylord, associate, at hgaylord@barclaydamon.com; contributors Carolyn Marcotte Crowley, partner, at ccrowley@barclaydamon.com, and Brian Rich, partner, at brich@barclaydamon.com; Janice Grubin or Jeff Dove, Restructuring, Bankruptcy & Creditors’ Rights Practice Area co-chairs, at jgrubin@barclaydamon.com and jdove@barclaydamon.com; or Robert Wonneberger, Thought Leadership Committee chair, at rwonneberger@barclaydamon.com.