United States – California
Below is a brief summary on California’s treatment of freezing orders, otherwise known in the United States as prejudgment attachments. Prejudgment attachment is a provisional remedy that allows for seizure of a defendant’s property prior to judgment. This ensures that a plaintiff successful on the merits may recover the amount owed by the defendant.
Note: Federal Courts only allow for pre-judgment attachment to the extent that applicable state statutes allow it.
1. Are freezing orders (or their equivalent referred to below) available in civil legal proceedings in this jurisdiction and what is their effect?
Yes. The defendant is prohibited from dealing with the assets referred to in the attachment until final adjudication at trial, arbitration, or further order of the Court.
2. Are other interim orders commonly made in conjunction with a freezing (or equivalent) order?
No. However, turnover orders – that direct the transfer of personal property to the levying officer – are sometimes also issued.
3. Briefly what is the relevant legal test?
Attachments issue pursuant to California Code of Civil Procedure § 481.010 et seq. An attachment may issue only for claims for money based on an express or implied contract. In addition:
(i) the total claim amount must be fixed or readily ascertainable and not less than US$500, excluding costs, interest, and attorneys’ fees;
(ii) the claim must be commercial;
(iii) if the claim is against a natural person, then attachment may only be issued on a claim arising from the defendant’s trade, business, or profession; and
(iv) the claim cannot be secured by real property, unless through no fault of the plaintiff the security has become valueless or decreased in value to less than the amount owed on the claim.
Please also note that if the claim is secured by an interest in real property that, through no action on the part of the party seeking attachment, has become valueless or worth less than the full value of the claim, attachment can be sought for the effectively unsecured portion of the claim.
4. Briefly what is the process for obtaining a freezing (or equivalent) order?
An application for attachment may be filed contemporaneously with or after the filing of the complaint. The application is supported by:
(i) a sworn statement that the attachment is sought to secure the recovery of a claim upon which an attachment may be issued;
(ii) a statement asserting the amount of the claim to be secured by the attachment;
(iii) a statement that the attachment is for no other purpose than the recovery of the claim upon which the attachment is based;
(iv) a statement that the applicant has no reason to believe the claim is discharged or stayed by a Title 11 proceeding; and
(v) a description of the property to be attached. The application must be supported by an affidavit or declaration from any person with knowledge of the facts.
The applicant must provide notice of the application and the hearing to the defendant upon attachment. Notice must include the amount to be secured as well as notice of any additional writs that may be issued. The defendant has the opportunity to appear at the hearing, to object to the issuance of the attachment, and to assert that certain property is exempt from attachment.
5. Does the applicant have to provide any form of security or commit to compensation if its claim is ultimately unsuccessful and any freezing (or equivalent) order granted causes loss and damage to the respondent?
Yes. The applicant must also file an undertaking with the Court to pay the defendant in the event the defendant is later able to recover for wrongful attachment. The presumed amount of the undertaking is US$10,000. If the Court determines that likely damages for wrongful attachment would exceed this amount, the Court may appropriately increase the undertaking.
6. Can it be sought against third parties?
Yes. Once an order of attachment issues, a third party to the underlying proceedings may be compelled to submit to an examination regarding property of the defendant in its possession. The third party must have possession or control of property in which the defendant has an interest or is indebted to the defendant in an amount exceeding US$250. The service of such order upon the third party creates a lien against the defendant’s property that continues for one year from the date of the order unless otherwise extended or ended.
7. What assets are covered by a freezing (or equivalent) order?
If the defendant is a natural person, subject property includes: real estate; accounts receivable, chattel paper, and general intangibles arising from the defendant’s conduct of a trade, business, or profession; equipment; farm products; inventory; final money judgments arising from the defendant’s conduct of a trade, business, or profession; money; negotiable documents of title; instruments; securities; and minerals to be extracted. Only assets within California may be attached.
8. Can a freezing (or equivalent) order be made in support of substantive proceedings abroad?
No.
9. Can a freezing (or equivalent) order be made in support of arbitration proceedings or awards?
Yes.
10. At what stage of proceedings can a freezing (or equivalent) order be sought?
When filing the complaint or at any time afterward during the pendency of the underlying action.
11. Are there typically any exceptions to the general prohibition on the respondent’s use of assets subject to a freezing (or equivalent) order?
Yes. Certain property is exempt from attachment, including: property that is exempt from a money judgment; property necessary for the support of a natural person defendant and their dependent family; and earnings (compensation payable to employees). Additionally, federal veteran disability benefits for service-connected disabilities are exempt, unless subject to child and spousal support enforcement.
12. What happens after a freezing (or equivalent) order is granted?
The party seeking attachment will provide written and signed instructions to the levying officer including:
(i) an adequate description of the property to be levied on; and
(ii) a statement as to whether the property is a dwelling and if so, whether it is real or personal property. As discussed above, once the attachment issues, the party can also seek supplemental orders against third parties who may be in possession of the defendant’s assets.
13. Who pays the costs of the application for a freezing (or equivalent) order?
The applicant pays the costs of the application. However, those costs can be included in the amount the attachment secures.
14. What protections are there typically in a freezing (or equivalent) order for third parties to such orders?
The attachment lien does not affect the rights of certain persons including, inter alia:
(i) a person who acquires an interest in the property under the law of California for reasonably equivalent value without knowledge of the lien;
(ii) a buyer in ordinary course of business who would take free of a security interest created by the seller or encumbrancer;
(iii) a lessee or licensee in the ordinary course of business who would take free of a security interest created by the lessor or licensor;
(iv) a holder in due course of a negotiable instrument; and
(v) a collecting bank holding a security interest in items being collected, accompanying documents and proceeds.
Third persons who themselves assert claims against property of the defendant in their possession may have those claims adjudicated by the Court.
15. What are the consequences of breach of a freezing (or equivalent) order?
A defendant who disobeys an attachment may be held in contempt of Court and may be imprisoned, fined or have their assets seized. A third party may only be in contempt of Court where they knowingly help or permit the respondent to breach the terms of the order.
16. Does a third party notified of (but not a party to) a freezing (or equivalent) order owe a duty of care to the applicant (meaning it can be liable to the applicant for non-compliance)?
No.
17. Can a freezing (or equivalent) order be enforced abroad?
No. An attachment only applies to property within California.
18. Can freezing (or equivalent) orders from overseas jurisdictions be enforced in this jurisdiction?
No.
Contacts
William O’Brien Partner – Head of Cross-Border Litigation & International Commercial Arbitration Eversheds Sutherland Washington, DC, United States williamobrien@eversheds-sutherland.us www.eversheds-sutherland.com Kymberly Kochis Partner – Co-Head of Global Litigation Co-Head of Insurance Litigation and Class Action groups Eversheds Sutherland New York, United States kymberlykochis@eversheds-sutherland.us www.eversheds-sutherland.com Francis X. Nolan IV Partner Eversheds Sutherland New York, United States franknolan@eversheds-sutherland.us www.eversheds-sutherland.com
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