Remember Mr. Freeze?

The D.C. Circuit today upheld a preliminary injunction freezing all assets of a company that participated in a fraudulent scheme.  The scam involved a consultant that the plaintiff, Ellipso, Inc., hired to obtain financing for it.  The consultant got the loan alright, but he didn’t disclose that he held a personal financial interest in the lender.  Ellipso pledged shares of stock in another company to secure the loan.  The collateral’s value at first represented twice the amount of the loan, but over time the value increased more than 10-fold.  After discovering the fraud, Ellipso sued to undo the loan and moved for a preliminary injunction to stop the consultant and the lender from disposing of the collateral.  The district court granted the motion and ordered a freeze on all of the lender’s assets, which consisted almost entirely of the stock and proceeds from selling some of the shares.  The court of appeals affirmed.  Ellipso, Inc. v. Mann, No. 05-7181 (D.C. Cir. Mar. 23, 2007).

The interesting part of the opinion addresses an argument that the defendants did not make — that an asset freeze exceeded the district court’s authority.  The court noted that such an order may issue only if the seeker of the freeze demonstrates "an equitable claim to the assets."  In Ellipso’s case, the company did assert that it equitably owned the collateral and should get it back as a result of undoing the fraudulent loan transaction.  Very smart, Blawgletter thinks.

Barry Barnett

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