American Bar Association Forum on Construction Law. You Can't Take My Equipment - Extraordinary Times Call for Extraordinary Measures

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1 American Bar Association Forum on Construction Law You Can't Take My Equipment - Extraordinary Times Call for Extraordinary Measures James Landgraf Dilworth Paxson LLP Cherry Hill, NJ John W. Ralls Ralls Gruber & Niece LLP San Mateo, CA Presented at the 2015 Annual Meeting April 15-18, 2015 Boca Raton Resort & Spa, Boca Raton, FL 2015 American Bar Association

2 When a dispute arises among the parties on a construction project, an attorney having familiarity with construction law will recognize a number of obvious tools to protect or further the client s interests. The owner s attorney will look to contract rights, including the right to perform work, the right to reject work, the right to withhold payment, the right to declare default under the terms of the contract, and the right to seek relief under bonds, if any were required. The contractor s attorney will look to the contractor s contractual right to make a claim, to cease work, to terminate and, if applicable, to record liens or pursue other payment remedies. Either party may be entitled, by contract or by law, to invoke a mediation or other ADR clause or to institute litigation. Sometimes, however, these well-known rights and remedies do not address a particular issue arising from the project, or at least, do not provide remedial protection as thoroughly or quickly as a party may desire. In those instances, construction counsel must look beyond the standard entitlements. This paper explores some of the additional tools that a construction attorney should be aware of and should consider depending upon the nature of the dispute and the need to customize appropriate remedies. I. Replevin A. The Remedy of Replevin in General A party claiming title and possession of property may have available to them the opportunity to bring the action of replevin. Replevin is a legal form of action ordinarily employed to recover possession or value of specific personal property claimed to be unlawfully withheld from the plaintiff. 1 It may also include a claim for damages for the detention of the property. It is primarily a possessory action in which the issues are ordinarily limited to title or right to possession of the goods. 2 Although a replevin action typically is possessory, it has been deemed an action at law with ultimate decisions to be made by a jury or other trier of fact. 3 At the center of a replevin action is the plaintiff s need to establish title or other right to immediate possession. 4 It is notable that a plaintiff may invoke a right of recovery of property under replevin even if it is not the title holder where it holds a right of possession at the time of bringing the suit. 5 That right to possession need only exist as against the main defendant and the Plaintiff is not required to set up title or right as against the whole world. 6 1

3 Following establishing the right of title or possession, a claim under replevin must establish a taking or detention by the named defendant. Simply put, an action of replevin cannot be maintained against a person not in actual or constructive possession of the property sought to be recovered. 7 Historically, many states have required that there also be evidence of a demand for possession having been made by the plaintiff to the defendant prior to institution of the action. 8 The requirements to bring an action in replevin may be included within statutory provisions. 9 In certain instances, the statutory provisions will have an overlayment of court rule process particularly when replevin actions are brought seeking immediate relief pending final determination which provides for the issuance of a writ of replevin on notice and alternatively under special circumstances for a writ of replevin issued ex parte. 10 Applicable rules may further provide that if the writ is for wrongful detainer, the plaintiff must allege and prove a demand and refusal of possession for commencing the action and if the plaintiff s title to the goods or chattels in replevin rests upon a third person or upon special property. 11 Similarly, a defendant claiming title through a third person or upon special property shall allege and prove such facts. Finally, where immediate possession is sought prior to a full determination upon the merits, a replevin bond to be posted by the party holds the property pending final determination may be required. 12 B. Use of Replevin in a Construction Dispute Context 1. Hurdles to Overcome To apply these principles in the context of a construction dispute, consider an on-going project in which the owner and original contractor have terminated their relationship. There may be separate litigation pending between them. The owner may seek immediate delivery of purchased materials that have not yet been delivered to the site. These materials may be in the possession of the contractor, separately stored, or still in the possession of a supplier. The materials may still be in fabrication. The supplier may or may not have already been paid, even if the contractor has received payment. 13 2

4 Owner s counsel faces a number of issues with regard to obtaining possession of the undelivered materials, based upon the required proofs, discussed above. If the contractor does not have possession of the materials, any action against the contractor to demand delivery would be meaningless particularly given the case law and the typical replevin requirement that the defendant have possession of the goods or chattels. If the materials are still with the supplier, the owner s claims become entangled with the contractor/supplier relationship. Similarly, the owner may have a difficult task of establishing right to possession. If payment has not been made, the owner will be hard pressed to establish such a right of possession. If payment was made, but no bill of sale was issued, the owner does not have any single document that provides a right of title or possession. If the owner has paid, but has retained 10% pursuant to the contract, it is evident that the owner has not paid 100 percent of that invoice. While this may be overcome where the materials or equipment is in the possession of the contractor who has received all that it is entitled to under the contract, again this can be an issue where a supplier/fabricator has possession but has not been paid in full. The owner will have to obtain the subcontract purchase order or other documentation establishing the relationship between the general contractor and the fabricator, and obtain the general contractor s bid estimate in an effort to establish cost and materials versus overhead and profits. The owner will also need to obtain the invoicing and payment records as between the fabricator and the general contractor. If the contractor did not make payment in full to the contractor (whether the monies were being withheld for general reasons or whether the monies were not due until delivered or whether the monies were being held as retainage), the fabricator would have as a defense that it had a superior possessory interest and title to the goods in question. In this case, the owner would have to further establish that the fabricator had received all that it was entitled to under its agreement with the contractor. 2. But, What If...? 3

5 As described above, the owner would have numerous issues and hurdles in meeting the requirements of showing title or immediate possessory rights and the lack of superior possessory interest as against the fabricator. The owner will also suffer from the fact that its contract is with the general contractor and not with the fabricator. The general contractor, assuming conditions were met entitling it to possession of the materials, would have a better and more direct interest and possessory right. Since the owner does not have privity with the fabricator, it would have to get past this additional roadblock. One variable would be if the owner required, as a condition precedent to issuing the payment to allow commencement of the fabrication, bills of sale or other appropriate documents placing ownership of the materials with the owner upon owner s payment. The difficulty that can arise from this option is that unless specific arrangements are otherwise made, the owner may have the risk of the loss and could have the added expense of insuring the materials or fabrication prior to delivery to the site. However, armed with such a bill of sale or other document transferring title and interest to the owner, the owner s ability to establish its legal title and/or possessory rights to the materials could defeat a claim by the fabricator to possessory rights. If the owner wishes to avoid the risk of loss problems, it could require as part of the prepayment process that upon payment of the general contractor to the fabricator, title would pass to the general contractor by way of a bill of sale or other documentation. This requirement could be combined with an obligation on the part of the general contractor to arrange for insurance to cover risk of loss until the materials are delivered to the site and an assignment of the title to the owner or alternatively a second level bill of sale or title transfer to the owner. In this fashion, the owner would have the transfer of title that protects its possessory interests in the materials but at the same time have the contractor responsible for the potential risk of loss. As further condition precedent to approving such a prepayment, the owner should and could require a copy of the underlying agreement the general contractor and the fabricator as well as issue the 4

6 payment on a joint check basis. The first would allow the owner to have assurance as to the actual costs of the materials and fabrication and the second would protect against a payment to the contractor which does not make it to the fabricator. With these processes in order, in the event of the dispute discussed above, the owner s ability to seek immediate possession of the partially or fully fabricated materials or equipment would be significantly increased as it would have documented proof of title and/or possessory right, it would have a record confirming the payment for the materials and fabrication, and it would have an acknowledgement by the fabricator that in exchange for the prepayment, it was agreeing to issue title and possessory rights. The AIA General Conditions (A ) touches on providing these protections for the owner. Section allows for payment for materials and equipment stored offsite at a location agreed in writing, if approved in advance by the owner. It further provides that payment for such materials and equipment shall be conditioned upon compliance by the Contractor with procedures satisfactory to the Owner to establish the Owner s title to such materials and equipment or otherwise protect the Owner s interests and shall include the costs of applicable insurance, storage, and transportation to the site for such materials and equipment stored off the site. 14 The provisions of section provide for the underlying support for an ultimate replevin action if that is needed. It also removes the risk of loss concern if one of the preconditions is that insurance coverage be obtained and costs be covered by the contractor (as well as storage and additional transportation). Accordingly, if the parties are using the AIA General Terms and Conditions, the owner should acquaint itself with the terms of section and insist on strict compliance in instances where the contractor is seeking payment for offsite materials or equipment. In preparing or reviewing a customized contract, if the form of contract does not include such a provision, counsel s best practice in preparing contract documents for the owner should be to include such a provision. II. Injunctive Relief/Temporary Restraining Orders 5

7 In some respects the reverse side of seeking a writ of replevin is the ability to seek temporary restraints through temporary or preliminary injunctive relief. Where a writ of replevin is an effort to require the defendant to turn over certain property, relief available under a temporary restraining order is typically to prevent the defendant from acting in a manner that would affect the rights to such property. A. Temporary Restraining Orders in General The owner on a construction project is interested in assuring that materials delivered to the project, or identified to the project will not be removed or otherwise lost. Where such materials are essential to the progress of the job and cannot be obtained by other means, the owner should consider applying for injunctive relief. In most jurisdictions, the courts under prescribed circumstances will issue temporary and immediate injunctive or restraining relief. Each of the states have their nuances, but the basic requirements are similar. In New Jersey, for example, the process involved in filing for injunctive relief, which would include temporary restraints and interlocutory injunctions, provides for an Order to Show Cause and Process. 15 This is typically filed with the initial pleadings with notice to the targeted defendant, although exceptional circumstances may exist that allow for the relief to be granted without prior notice. If the requisite showings are present in a verified complaint, a temporary restraining order may be issued with a return date normally no more than thirty five (35) days after the execution of order although a defendant is entitled to seek a more immediate hearing on two days notice. On the return date, the defendant may present any evidence or information to show cause why the restraints should not continue. If the defendant is unable to make such showings, the restraints will continue until there is a full plenary proceeding. If defendant is able to show that the restraints should not continue, on a practical level, many of the cases are then concluded. However, simply showing that there is an inadequate basis for the temporary restraints does not in itself constitute a final determination of the case. 6

8 In reviewing the plaintiff s complaint and the issues before it, a court in New Jersey is guided by the multi-part test enunciated in Crowe v. DeGoia: (1) plaintiff has a reasonable probability of success on the merits, (2) if relief is not granted, plaintiff will sustain immediate and irreparable harm, (3) there exists no adequate remedy of law, (4) the requested relief will not cause undue harm to the defendant or third parties, and (5) plaintiff s potential hardship in the event of the lack of restraints will outweigh the hardship that may be sustained by the defendant. 16 Although unstated within the five-prong test of Crowe v. DeGoia, a further consideration made by the Court is whether to protect or maintain the status quo while the underlying action is proceeding. 17 Although not always stated in the same fashion, other states provide similar processes and similar considerations when reviewing a temporary restraining order request. These include protection of the status quo. 18 Similarly, the states, in one fashion or another, have adopted through their case law the requisite tests needed to be met by a plaintiff seeking temporary restraints under terms similar to that of Crowe v. DeGoia Likelihood of Success on the Merits The first prong on the Crowe v. DeGoia test is that the Plaintiff must demonstrate a likelihood that it will succeed upon the merits under the particular facts and law associated with the claims that it is making. 20 A court is not going to provide the extraordinary relief available under a temporary restraining order where the relief sought by the plaintiff is neither supported by the facts nor the applicable law. As an initial showing, the plaintiff has the burden in a preliminary injunction proceeding to demonstrate the reasonable probability of success at trial. 21 Notably, however, the standard of reasonable probability of ultimate success is significantly lower than the higher standard of proof of clear establishment of a legal right, which may be required at trial. 22 The purpose of this lesser standard is to place the burden upon the plaintiff at least sufficient to generate the court s willingness to maintain the status quo until a final verdict can be rendered on the merits. 23 7

9 2. Establishing Immediate and Irreparable Harm and No Adequate Remedy at Law These two requirements are often combined or sometimes used interchangeably. Establishing immediate and irreparable harm is a primary basis of a temporary restraint. The lack of an adequate remedy at law damages is often interchangeable with requirement that there be immediate and irreparable harm. The plaintiff must establish that in the absence of the temporary restraints, it will sustain immediate damage and loss that cannot be adequately remedied by a monetary judgment. Conversely, if a court can be convinced by the defendant that the plaintiff can be fully made whole by a monetary judgment at the end of a trial upon merits, the defendant has a reasonable opportunity to prevent the entry of temporary restraints. Harm is generally considered irreparable in equity if it cannot be redressed adequately by monetary damages. 24 Courts have allowed temporary relief where damages are simply difficult to quantify Relief Will Not Cause Undue Harm and Balancing of Equities or Hardship Again, these two requirements often are decided in the same breath. A review of the potential hardship upon the defendant and balancing of hardships is the final analyses to be performed. In evaluating the need for a preliminary injunction, the court must balance the plaintiff s need for protection against any harm that can be reasonably expected to fall upon the defendants, and if the former outweighs the latter, the courts will are instructed by case law granting the injunction assuming the other showings have been met. 26 Put another way, a preliminary injunction will not be issued unless greater injury will be done by refusing it than by granting it. 27 When reviewing the equities or relative harm to the parties, the courts are typically again guided by whether or not the relief sought would create simply a monetary disadvantage for the defendant, which may be recoverable by monetary damages, or whether it will create a less compensable hardship or loss. 8

10 B. Application to a Construction Case A contractor, subcontractor, or supplier, in the event of a dispute involving the owner, may wish to recover materials held at a separate site, remove materials that have been delivered to the project site but not installed, or remove materials that have been installed. The owner, conversely, is anxious to prevent any such actions by the on the basis that the owner has claimed that it has paid, at least in part, for those materials that the owner is in possession of at least a portion of those materials that were delivered to the site, that the owner s project will be immediately and irreparably harmed by the loss of the materials, including the removal of materials that have already been installed, and that the owner has no adequate remedy at law. The owner will further take the position that leaving the materials in place will maintain the status quo while the case proceeds on a trial on the merits. Accordingly, even if the owner cannot establish the requisite showings for replevin, it may have a basis to at least keep things in place until there is a full hearing. 1. Likelihood of Success on the Merits On the first prong of the traditional test for injunctive relief (likelihood of success on the merits), the owner will claim that it has paid for the materials, that the materials have identified to the project, and that, at least in part, the materials have been incorporated into the project. As the owner had paid the general contractor prior to fabrication, the owner will make a claim similar to that in the previously discussed replevin action, that the owner has an immediate claim to title and/or possession, even of the materials that have not yet been delivered to the site. Accordingly, the owner will seek a temporary restraint to prevent the fabricator from removing materials from the site from reclaiming the materials from storage or using the materials for a separate project. The owner will also want to seek the ability to continue with its installation of the materials and will also try to seek the ability to have the materials delivered from storage to the site. 9

11 In response, the fabricator will argue that there does not exist a likelihood of success on the merits for the owner on the basis that the fabricator has not relinquished title to the materials particularly those that are held in storage. The fabricator will assert that until it is paid in full for the materials, it continues to have a superior title and possessory interest in the materials. The owner has a viable argument for a likelihood of success on the merits where it has made payments, at least with respect to the materials that are on the site (whether they have been installed or not). As they have been delivered and accepted, risk of loss has passed from the fabricator to the owner, thereby providing further support to the owner s superior possessory rights to those materials. With respect to the materials that are held in storage, and assuming that a bill of sale, as discussed in the previous section of this article, has not been issued, the owner s likelihood of success on the merits is more tenuous. Who retains the risk of loss of those materials may be a determining factor. If the storage has been arranged for by the fabricator or even the contractor and the materials are being insured by the fabricator or contractor, the owner s likelihood of success on the merits may not exist. 2. Adequate Remedy at Law/Immediate & Irreparable Harm On these portions of the test, the owner will claim that it will sustain immediate and irreparable harm to the project since repossession of the materials or re-use of the materials by the fabricator or contractor will cause significant delay to completion of the project while the owner must arrange for alternate materials. With respect to the materials that have already been incorporated into the project, the owner will also have available to it, the argument that immediate and irreparable harm would occur as a result of damage to the building caused by the removal of such previously installed components. The owner s argument will extend this immediate and irreparable harm to materials on the ground and to those in storage as again it would result in delay to the project and presently incalculable damages which could not be adequately addressed by monetary damages unless or until months or years down the road when the final project was completed. 10

12 In countering the arguments of the owner, the contractor/fabricator/subcontractor can raise the point that even though damages may be difficult to presently calculate, they can be ultimately determined and therefore, all the owner has is a claim for monetary damages associated with the delay in construction, increased costs in replacement of the materials, and similar compensatory losses. Where materials have not been delivered, but are not custom materials, there is a further argument against irreparable harm, since the materials can be duplicated. The owner can counter, if the materials are in fact customized for this project, that it does not have the immediate ability to provide substitute materials and certainly cannot determine what the costs to substitute custom materials would be, how much damage could potentially occur as a result of an unenclosed building, what delay costs would be incurred as a result of awaiting a wholly new (perhaps specially fabricated) component, and what losses may result from the inability to occupy the building at the anticipated date. Although there is a potential future ability to quantify the damages that may ultimately be sustained, there is support for equating difficulty in establishing damages with the impossibility of establishing damages as the courts are hesitant to deal with conjectural or speculative damages Balancing of the Equities and Undue Hardship Under these prongs of the test, the owner will assert that it will sustain irreparable harm and presently incalculable damages if the materials are repossessed and removed from the site or storage or otherwise used by the contractor, subcontractor or supplier. As to their potential hardships the owner will take the position that the issue is simply that someone has not been paid in full for its work. Using the immediate and irreparable harm analogy, the owner will argue that the contractor, subcontractor or fabricator has available to it a remedy of seeking monetary damages against the appropriate party for the failure to make payment for the materials. For purposes of temporary restraints, the owner may even concede that the defendant would have a potential claim against the owner for damages, but again 11

13 such would be monetary damages. The owner further has available to it the clear argument that this is a commercial transaction, and there is no overriding harm to the public if the preliminary restraints are granted. Finally, if the material or equipment was largely a customized fabrication, the owner can assert the argument that repossessing the materials is not going to provide any real benefit to the contractor or fabricator, since they have already been customized for this project and are not readily capable of transformation for a different project. On these prongs of the test, the contractor, subcontractor or fabricator will, frankly, be hardpressed to establish that it will be harmed more significantly than the owner if the restraints are granted. They could conceivably argue that the general contractor is no longer a viable entity, assuming that it is accurate, and that even though the materials were custom fabricated for this project, there remains some value in those materials from which the fabricator can salvage certain of the losses. It is questionable, however, whether those arguments would prevail on the balancing of the hardship and equities. 4. Status Quo Going past the above separate considerations and assuming that there are no clear overriding public considerations, courts would very likely turn to the status quo position. A court may issue temporary or preliminary restraints on a less than exacting showing if necessary to prevent the subject matter of the litigation from being lost or destroyed. Under this consideration, each side could come away less than satisfied. On the one hand, maintaining the status quo would preclude the immediate removal and re-claiming possession of the materials regardless of their location. On the other hand, a court applying the tests conservatively may also restrict the temporary restraints to the extent that they would have allowed the owner to continue to install materials that were onsite and/or to have stored materials delivered to the site. Under the status quo approach, by leaving all of the materials in their 12

14 present condition (those that were installed, stored onsite, or stored at the warehouse), the court has at least determined that nothing will change pending a hearing on the request for temporary restraints. 5. But What If...? What if the fabricator had executed security agreements with its own creditors that included granting a security interest in its inventory? That creditor is now attempting to enforce its security agreement by seeking possession of the materials in storage, onsite, and installed. The same action seeking temporary restraints would be brought by the owner. The same arguments and positions would be raised by the owner. In this case, however, instead of the fabricator pursuing a claim based on a breach of contract claim with a general contractor, the bank or other secured creditor is now attempting to raise a superior title to the materials. The owner, who has requested relief, must now identify that secured creditor and the fabricator as defendants. The owner will make the basic argument that simply because a bank has a security interest in the fabricator s inventory, the bank does not have a greater right than what the fabricator would have had. Obviously, if title documents had been issued as a result of the offsite material prepayment or if risk of loss had been transferred from the fabricator to the owner or contractor, the claims of the secured creditor would diminish. Even if that documentation did not exist, however, the secured creditor, while arguing that it has right and title of inventory, would face the same limitation that the fabricator had in preventing the issuance of a temporary restraint. Where the secured creditor may have a stronger argument over the fabricator would be at a point after initial issuance of the temporary restraints and with respect to the materials held in storage. The secured creditor may have a strong argument that it does not matter whether these were custom fabricated materials or not, or how much the fabricator has been paid. As long as title remains with the fabricator, under the security agreement, the secured creditor would typically have absolute title to those goods until it could be established that title has changed hands. Under these circumstances, while the 13

15 owner may be able to obtain the temporary restraints at the outset, it may not ultimately prevail in being able to take possession in materials that had not already been delivered to the site. III. Prejudgment Writs of Attachment Prejudgment attachment is a powerful remedy that can be used at the outset of litigation. As one U.S. District Court put it, Attachment is an ancillary remedy by which a plaintiff acquires a lien upon the property of a defendant in order to obtain satisfaction of a judgment that the plaintiff may ultimately obtain at the conclusion of the litigation. 29 Obtaining such a lien early in the case can exert great pressure on a defendant to settle. It is a remedy well worth exploring. A. How Prejudgment Attachment Works Attachment is a statutory remedy and so the exact procedures vary from jurisdiction to jurisdiction. 30 Generally, a written application has to be filed with the court. Generally, the application must set forth a meritorious contract claim in a certain amount. (The certain amount requirement makes the remedy inappropriate in many construction cases consider most delay or disruption claims.) Most states require, prior to issuing a writ of attachment, a bond or undertaking for paying the defendant any damages that may result from a wrongful attachment. 31 The circumstances and types of actions authorized for attachment vary across states, but the requirement of proving probably validity of the claim is universal. The statutes typically permit the court to issue the attachment order on an ex parte basis. With a few exceptions (most commonly for wages and property exempt from execution), virtually all of the defendant s real and personal property is subject to prejudgment attachment, whether tangible or not. Even property in the hands of third-party garnishees may be subject to prejudgment attachment. 32 Attachment remedies are generally available for actions for a debt or on a contract. 33 As noted above, in most states, the sum claimed to be owed must be a sum certain

16 Once the bond is posted and a writ of attachment has been issued, the order granting the issuance of the writ of attachment will direct the sheriff to attach the debtor s property. 35 The statutes usually permit the defendant (or the garnishee) to post a bond to obtain the return of the attached property, and often permit the defendant to obtain its return without posting a bond upon a showing that the attachment order issued improperly. 36 B. What Jurisdictions Recognize Prejudgment Attachment Pennsylvania is the only state that does not recognize prejudgment attachment as legal remedy. 37 Prejudgment attachment statutes differ with respect to the types of actions, parties, and property that may be subject to the remedy. Many states (including California) limit the remedy to contract actions for a fixed or readily ascertainable amount. 38 Other states (Delaware is one) limit the availability of the remedy based upon the residency or location of the defendant. 39 State attachment remedies generally are limited by territory only allowing for the attachment of property found within the state in which suit is pending. The attachment of property as an ancillary remedy to secure a debt is based on the theory that a state has comprehensive authority over all property within its territorial limits and may seize such property for payment of claims asserted in actions in its courts. 40 Consequently, courts will generally only issue writs of attachment for property found within the state in which the suit is pending. 41 Twenty-seven states, as well as the District of Columbia, permit attachments only when some extraordinary circumstance is present. In such cases, pre-attachment hearings are not required but post-attachment hearings are provided. Ten states permit attachment without the presence of such factors but require pre-writ hearings unless one of those factors is shown. Six states limit attachments to extraordinary circumstance cases, but the writ will not issue prior to a hearing unless there is a showing of some even more compelling condition. 42 Attachment is also available in federal court. The federal rule on prejudgment seizure Federal Rule of Civil Procedure 64 makes all state law remedies for seizing a person or property to secure 15

17 satisfaction of the potential judgment available in federal courts. The Federal Rules of Civil Procedure govern the general procedural aspects of an attachment action (service of process, time limitations, and appearance requirements). 43 Otherwise, and absent a conflict with some Federal Rule, the other provisions of the applicable state s attachment remedy apply (including what must be shown). Federal Rule of Civil Procedure 64 is also limited in that creditors may only use the federal rule to reach a debtor s assets held within the state in which the federal court sits. 44 C. California Example California has a detailed attachment procedure that represents a good example of how attachment works. California s attachment law is set forth in pages of statutes. 45 California permits attachment for monetary claims, based on an implied or express contract, in a fixed or readily ascertainable amount. 46 The claimed contract damages must be measurable by reference to the contract itself. 47 The plaintiff must also demonstrate that it is more likely than not that the plaintiff will obtain a judgment against the defendant Probability of success on the merits limits the availability of the remedy, since the remedy might otherwise offend due process: Attachment is a harsh remedy because it causes the defendant to lose control of his property before the [plaintiff s] claim is adjudicated. 49 As a remedy not recognized at common law, the California prejudgment attachment statute is subject to strict construction. 50 Applying the strict statutory compliance standard, one U.S. district judge in California s Central District summarized the significant evidentiary burden on the party seeking attachment: 51 The application for a right to attach order must be supported by an affidavit or declaration showing that the applicant, on the facts presented, would be entitled to a judgment on the claim upon which the attachment is based. C.C.P The affidavit or declaration must state the facts with particularity. C.C.P Except where matters are specifically permitted to be shown upon information and belief, each affidavit or declaration must show that the affiant or declarant, if sworn as a witness, can testify competently to the facts stated therein. Id. At a minimum, this means that the affiant or declarant must 16

18 show actual, personal knowledge of the relevant facts, rather than the ultimate facts commonly found in pleadings, and such evidence must be admissible and not objectionable. Calif. Evid. C D. Notice or Ex Parte An important distinction is whether attachment can be obtained on an ex parte basis or whether notice and an opportunity to be heard is required. In most states, writs of attachment may be obtained ex parte upon a showing of exigent circumstance or if the creditor posts a bond. For example, California requires that the claimant both post a bond and show that great or irreparable injury would result to the plaintiff if issuance of the order were delayed until the matter could be heard on notice. 52 In order to establish great or irreparable injury, a California claimant has to submit declarations that would permit the court to infer that there is a danger that the property sought to be attached would be concealed, substantially impaired in value, or otherwise made unavailable to levy absent a noticed hearing. 53 In some cases, the utility of a prejudgment attachment may be undermined if the plaintiff is compelled to proceed on notice. The defendant or a third person in possession of the defendant s property may use the time between service of the notice and a decision on the plaintiff s motion to dispose of the property sought to be attached. For this reason, some states permit the court to grant a temporary restraining order forbidding any transfer of the defendant s assets while the court considers a plaintiff s motion for an order directing issuance of a writ of attachment. 54 California and New York, for example, allow creditor s to seek temporary restraining orders in addition to writs of attachment so that the debtor s assets are preserved during the pendency of an underlying suit. 55 Similarly, under Missouri s attachment statute, a debtor s property can be attached upon a showing to the court that the debtor conceals himself, so that the ordinary process of law cannot be served upon him

19 E. Advantages of Attachment over Other Payment and Creditor Remedies Prejudgment attachment provides the unpaid contactor greater relief than foreclosing on a mechanics lien where the equity remaining in the real property is less than the other property that may be preserved through attachment. If the contractor has failed to record or otherwise perfect a mechanics lien, attachment may be the contractor s only remedy for effectively enforcing an eventual money award against the owner. Of course, mechanic s liens attach to the real property that is the subject of the construction contract. If the owner holds real or personal property interests other than the real property attached by a mechanics lien, then attachment may reach additional assets. 57 [A]ttachment deprives the defendant of possession and use of her personal property as well as unencumbered title to her real estate. The severity of these deprivations has caused some commentators and courts to note that an attachment order dramatically changes the bargaining power between plaintiff and defendant, giving the plaintiff substantial leverage over the defendant. 58 A fast settlement prior to the hearing and favoring the contractor may be preferable to the contractor, but even if settlement cannot be reached, the hearing may serve as an indicator of success at trial. F. Lien Priority and Bankruptcy Advantages During the pendency of most tort cases and many contract cases, the plaintiff has no security interest in any of the defendant s property. 59 In other words, most plaintiffs are unsecured creditors, subordinate to other creditors who have some kind of lien right in the assets of the defendant. The position of a secured creditor in a bankruptcy proceeding is far better than the position of an unsecured creditor. 60 If the plaintiff obtains a prejudgment attachment against a defendant, the plaintiff acquires an attachment lien in the attached property. The attachment lien gives the plaintiff priority over unsecured creditors and claimants who obtain liens on the same property that were created or perfected later than the attachment. Because this attachment lien also constitutes a judicial lien in a bankruptcy 18

20 proceeding, the plaintiff is treated as a secured creditor with a substantially improved position on the totem pole of claims when distributions are made in bankruptcy. Because the attachment lien benefits the plaintiff vis-à-vis other creditors of the defendant, the other creditors may feel compelled to protect themselves by forcing the debtor into involuntary bankruptcy. In fact, such other creditors may be under time pressure to do so, because they may be able to have the attachment lien avoided if they file the bankruptcy petition within 90 days of the levy on the attachment order. As a result, the plaintiff seeking an attachment order may alarm the defendant s other creditors and push the defendant into bankruptcy. 61 IV. Prejudgment Remedies Pre-Litigation Discovery suit is filed. Most procedural rules allow under limited circumstances for discovery to start even before A. How Pre-Suit Discovery Statutes Differ One commentator nicely summarized the different types of pre-suit discovery rules: 62 Nearly all jurisdictions, by rule, statute, or common law, allow prospective parties to petition the court for discovery before filing a formal lawsuit. In most instances, however, the right to use discovery devices before litigation is narrowly tailored. Presuit discovery typically may only be taken to preserve witness testimony when there is a credible risk that the testimony may be lost if it is not recorded immediately. In several jurisdictions, the formal law permits discovery before suit for the broader purpose of confirming the proper party to name as a defendant and/or to gather additional information when necessary to institute legal proceedings. Even in these forums, however, the formal law purports to disallow discovery for the broader investigatory purpose of determining whether a cause of action exists. Few jurisdictions stretch the presuit investigatory discovery entitlement to its farthest limit. Some state courts (generally, those with fact-pleading requirements) permit pre-suit discovery for the purpose of obtaining the factual information necessary to draft a complaint. In other states, however, pre-suit discovery is limited to the preservation of evidence that is likely to be lost or destroyed

21 B. Pre-Suit Discovery under the Federal Rules (FRCP 27) Federal Rule of Civil Procedure 27 has a narrow pre-litigation discovery rule. Such discovery is allowed to perpetuate testimony only. Federal courts generally only grant Rule 27 petitions for the preservation of evidence that is likely to be lost. The underlying purpose of Rule 27 is for the preservation of evidence which would be unavailable otherwise rather than as a means for precomplaint discovery. 64 It is with this underlying purpose in mind that courts frequently observe how [Rule 27] is not a substitute for broad discovery. 65 Moreover, petitions for pre-suit depositions may only be granted under Rule 27 where a witness may leave the jurisdictional reach of the court s subpoena power, if where a key witness may become terminally ill. The success of a Rule 27 petition for pre-suit discovery will likely depend upon the preservation of evidence that is likely to be lost otherwise. An order granting the petition for pre-suit discovery may be granted if the court finds that perpetuating the testimony may prevent a failure or delay of justice. Rule 27 pre-suit discovery is therefore unavailable to plaintiffs that need more facts to allege in order to meet the federal pleading standard. 66 Unlike those state statutes that allow pre-suit discovery for evaluation of claims purposes, [Rule 27] does not provide a method of discovery to determine whether a cause of action exists, or against whom an action should be initiated. 67 C. Broadest Pre-Suit Discovery Statutes The broadest pre-suit discovery statutes are those in Texas and Alabama. 1. Texas Texas pre-suit Rule 202 discovery requires significant judicial oversight. This rule allows [a] person [to] petition the court for an order authorizing the taking of a deposition on oral examination or written questions either: (a) to perpetuate or obtain the person s own testimony or that of any other person for use in an anticipated suit; or (b) to investigate a potential claim or suit. 68 Before trial courts will grant Rule 202 petitions they are required to make a determination that the likely benefit of allowing 20

22 the petitioner to take the requested deposition to investigate a potential claim outweighs the burden or expense of the procedure. 69 Proponents of Rule 202 argue that such a broad rule is needed to overcome increasingly difficult barriers to filing suit, such as onerous pleading standards and the threat of sanctions for filing frivolous claims. 70 Texas courts have cautioned against Rule 202 discovery abuses, which can burden both courts and litigants. The Supreme Court of Texas has stated that [t]he intrusion into otherwise private matters authorized by Rule 202 outside a lawsuit is not to be taken lightly 71 in the pre-suit context, and consequently it suggested that judges should maintain an active oversight role to ensure that [Rule 202 discovery is] not misused. 72 Rule 202 discovery is not intended to apply to a majority of cases. However, a recent survey of lawyer respondents indicated that Rule 202 is used about 40% of the time for the uncontroversial purpose of perpetuating a witness s testimony; the remaining 60% of the time, the rule apparently was used for investigating a claim before filing suit Alabama Alabama law favors broad pre-suit discovery for claim investigation. Rule 27 of the Alabama Rules of Civil Procedure authorizes pre-suit discovery but only for the stated purpose of perpetuating testimony. 74 However, the Alabama Supreme Court interprets Rule 27 to apply regardless of any need to perpetuate evidence 75 if the plaintiff seeks pre-suit discovery to determine whether there is a reasonable basis for filing an action. 76 Therefore, Alabama courts may permit pre-suit discovery under Rule 27 for the purposes of investigation and evaluation of potential claims Other Broad Pre-Suit Discovery Statutes (New York, Pennsylvania, and Florida) New York law permits pre-suit discovery only upon a showing that it is necessary to plead a cause of action. 78 Before an action is commenced, disclosure to aid in bringing an action, to preserve information or to aid in arbitration, may be obtained, but only by court order. 79 The New York rule also authorizes a court to appoint a referee to take testimony. 80 Contrary to the expansive interpretation of 21

23 the Alabama statute by Alabama courts, the New York courts interpret the pre-suit statute narrowly. 81 New York courts usually will not allow this pre-suit discovery rule if it will only be used by the plaintiff to evaluate whether facts exist sufficient to create a meritorious cause of action. 82 Another example is Ohio, which adopts a pre-suit discovery rule similar to the broad investigatory purpose of Federal Rule 27. The Ohio pre-suit discovery statute is authorized for the preservation of evidence or to assist a prospective party in ascertaining the identity of a potential defendant. 83 Additionally, the Ohio statute authorizes a court to grant an applicant s petition under this rule if the applicant cannot plead a cause of action without discovery of a fact from the adverse party. 84 Pennsylvania authorizes pre-suit discovery through a balancing test. Under Pennsylvania law, pre-suit discovery may be granted where the information sought is material and necessary to the filing of the complaint and the discovery will not cause unreasonable annoyance, embarrassment, oppression, burden or expense to any person or party. 85 If these forgoing requirements are satisfied, the defendant may still object. Upon the defendant s objection to pre-suit discovery under this rule, a court may require the plaintiff to state with particularity how the discovery will materially advance the preparation of the complaint. 86 This functions as an added safeguard against charges that the plaintiff filed a frivolous lawsuit in a case where the wrongdoer or a third party has the ability to hide the facts needed by the plaintiff to determine who is the wrongdoer and exactly what wrong occurred. 87 The Florida pre-suit discovery statute is limited to preservation of evidence. 88 But Florida courts alternatively recognize a right to bring an equitable bill of discovery to obtain the disclosure of facts within the defendant s knowledge or deeds or writings or other things in his custody, in aid of the prosecution or defense of an action pending or about to be commenced in some other court. 89 D. Narrow Pre-Suit Discovery Statutes The majority of state statutes have adopted pre-suit discovery rules nearly identical to Rule 27. The states of Alaska, Arizona, Arkansas, California, Florida, Iowa, Kansas, Michigan, Minnesota, New 22

24 Mexico, Rhode Island, and Vermont have all adopted pre-suit discovery statutes limiting pre-suit discovery for the purpose of the perpetuation of testimony. Like Rule 27, these states do not permit the use of pre-suit discovery for the purpose of evaluating potential claims. Some of these states are even more restrictive by prohibiting the use of pre-suit depositions for discovery or evaluation of claims purposes. California s pre-suit discovery rule cannot be used for the purpose of either ascertaining the possible existence of a cause of action or a defense to it, or of identifying those who might be made parties to an action not yet filed. 90 Moreover, pre-suit discovery is substantively the same in both state and federal courts in California: Even if there is a possibility that discovery could turn up some hypothetical evidence to support a cause of action, plaintiffs cannot unlock the doors of discovery if they are armed with nothing more than conclusions. 91 Iowa and Kansas have adopted the same rule by only allowing pre-suit depositions not for the purpose of discovery. 92 It follows that most states only permit depositions under such limited circumstances, and other tools like pre-suit inspection of documents are not authorized under these rules. Another large minority of states have adopted statutes similar to Rule 27, except they also allow for the pre-suit inspection of documents and medical exams. 93 E. Pre-Arbitration Discovery As one would expect, court-supervised pre-arbitration discovery is more limited that prelitigation discovery. Pre-arbitration discovery is typically limited to ascertaining the enforceability of an arbitration clause. 94 Arbitrability is generally considered a legal issue for courts not arbitrators. 95 The FAA authorizes a federal district court to enforce an arbitration agreement: 96 The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. State courts similarly restrict pre-arbitration discovery to the threshold issue of whether the parties intended to form an agreement to arbitrate: [T]he FAA contemplates not just a stay of the trial, but a 23