• July 12, 2019

Update (July 12, 2019): We’re not optimistic for Plaintiff B. Riley FBR Inc. (“Riley”), the subject in the post below, in its latest effort to get paid on a mining deal that failed. Riley now brings a fraud claim against Defendant Thomas Clarke, personally, the C.E.O. of a mining operation, when Riley’s real target would appear to be the penniless mining operations themselves, not the C.E.O.

It seems pretty clear that the companies involved have no money and Riley is casting about for someone else with money. So Riley has sued Clarke for fraud and Clarke has responded with a strong motion to dismiss. (Here is the brief in support of Clarke’s motion to dismiss and Riley’s response.)

In business transactions gone awry, it is often difficult to produce evidence that the counter-parties never intended to perform, which is what the allegations are against Clarke and must be to state a claim for fraud (as opposed to breach of contract). (To bring a successful fraud claim, it is not enough to show the counter-parties ultimately failed to perform. The fraud plaintiff must come forward with evidence of bad faith, in essence, from the get-go.)

Original post (December 3, 2018) (under the headline: An Illustration of the Contortions of U.S. Law): B. Riley FBR Inc. (“Riley”) v. Chippewa Capital Partners LLC (“Chippewa”), et al., is a lawsuit now pending before U.S. District Court Judge Nancy E. Brasel (D. Minn.). A recent decision in the case gives us a nice snapshot of our convoluted legal system.

Riley’s efforts make a great deal of sense. Judge Brasel, nevertheless, correctly denied Riley’s motion for a preliminary injunction. Why?

The case appears to be simple. Riley performed a bunch of work for the defendants based on an agreement that the defendants would pay Riley about $16 million. Riley’s not been paid.

Chippewa and the other defendants don’t have much money and Riley sought an order from Judge Brasel to freeze the defendants’ money (a preliminary injunction) so that, when all’s said and done, Riley will not be left with worthless judgments against several insolvent entities.

This is where the contortions of our U.S. legal system come into play.

First, our legal system derives from the British legal system, which, in the 18th Century, distinguished between “courts of law” and “courts of equity.” Only in the latter courts would a litigant be entitled to a preliminary injunction, which is categorized as an “equitable remedy.”

Complicating matters a little bit, our court system merges courts of law and equity into a single court. Nevertheless, U.S. courts in particular cases may “sit in equity” (and have recourse to equitable remedies) or they may not.

Complicating matters more, as the U.S. Supreme Court held in the linked decision, although British courts, since 1975, sitting in equity, have permitted exactly the kind of equitable relief that Riley sought from Judge Brasel, the U.S. Supreme Court, in a decision written by Justice Antonin Scalia (over a dissent), held that the issue is not whether British courts in equity allow for this kind of remedy today (or in 1975) but, rather whether they did at the time of the Judiciary Act of 1789 (which they clearly did not).

Complicating matters still more, our court system is all built on top of a dual state/federal system and, as Justice Scalia’s opinion points out, our federal courts are authorized to seize “a person or property” under state law procedures. If U.S. district courts could “seize property” via the equitable preliminary injunction route in a case seeking “money damages,” it would seem to render these other remedies under state law “a virtual irrelevance.”

Note that the question of whether it makes sense to let an unsecured creditor like Riley to freeze debtors’ assets to secure a future judgment — that is, a question of policy and what some might consider a sensible creditor remedy (a prejudgment asset freeze) — is irrelevant to the U.S. Supreme Court’s analysis. (“Because such a remedy was historically unavailable from a court of equity, we hold that the District Court had no authority to issue a preliminary injunction preventing petitioners from disposing of their assets pending adjudication of respondents’ contract claim for money damages.”)

The ruling in Riley v. Chippewa on Riley’s motion for a preliminary injunction is an embodiment of the convoluted nature of the reasoning that is the foundation of our legal system. Some would suggest it is analogous to a cook being obligated to follow a complicated recipe without regard to whether the result is edible. Others would counter that judges are not free and must not be free to act based on their own “notions and conscience,” deciding what is “justice” according to their personal taste with the unfettered discretion of a master chef.

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