In 2012, the National Conference of Commissioners on Uniform State Laws (NCCUSL) developed the Uniform Asset-Freezing Orders Act (UAFOA). An asset-freezing order freezes the assets of a person or entity who is a defendant in a lawsuit so long as those assets are not exempt from execution under state law. The NCCUSL argues that the UAFOA “creates a uniform process for the issuance of asset freezing orders, which are in personam orders freezing the assets of a defendant in order to prevent a party from dissipating assets prior to judgment.” However, the UAFOA contains a number of onerous provisions that create unfair burdens for parties who have not been found liable for anything.
The NCCUSL argues that states should adopt the UAFOA because it
- Provides a uniform process with procedural protections
- Applies to third party holders of a target defendant’s assets
- Creates uniformity in recognition and enforcement
- Allows reciprocity or recognition of such orders in foreign courts
- Provides that the orders are entitled to full faith and credit in the same manner as a judgment
That sounds reasonable enough. However, a close examination of the UAFOA reveals its overly broad scope, and how much of a burden it places on parties who have yet to be found at fault for anything.
The UAFOA authorizes courts to issue asset-freezing orders in any action in which the plaintiff seeks monetary damages. The only exceptions are cases involving consumer debt or that arise from a state’s family or domestic relations law. Thus, outside those two limited exceptions, the UAFOA potentially comes into play any time a plaintiff claims money damages to right an alleged wrong. The plaintiff does not even need to show that the target defendant has made some attempt to move or otherwise hide assets.
Steven Puiszis is a partner at Hinshaw & Culbertson LLP and a member of the DRI Center for Law and Public Policy Task Force on Asset-Freezing Orders. (Full disclosure: I am a member of DRI and serve on its Insurance Law Committee.) In the March 2013 issue of For the Defense, DRI’s monthly magazine, Puiszis noted a number of additional problems with the UAFOA
- The UAFOA permits a plaintiff to freeze a defendant’s assets before any judgment is entered, before any fault is found or even before any discovery has commenced.
- The UAFOA’s broad definition of potentially freezeable “assets” includes “anything that may be subject of ownership, whether real or personal, tangible or intangible, legal or equitable, or any interest therein,” including assets in which an innocent third-party shares an ownership interest.
- A defendant must seek court permission to pay “ordinary living expenses, business expenses, and legal representation,” and prove the amount of those expenses.
- The UAFOA requires a court to recognize an asset-freezing order issued by a non-U.S. court unless certain grounds for non-recognition exist.
The UAFOA requires that a party seeking an asset-freezing order make a preliminary showing that there is a “substantial likelihood” that the target assets will dissipate so that the moving party will be unable to recover a hypothetical, future judgment. This requirement may force target defendants to disclose assets to avoid the harsh consequences of an asset-freezing order. Ordinarily, a defendant’s assets are only discoverable in connection with punitive damages claims.
When a court issues an asset-freezing order, the target defendant must get court permission to use its own assets as it sees fit, again, before any liability has been found. For example, a company may not be able to sell an asset or mortgage property to raise capital. An individual may not be able to send a child to college or to make home improvements. Under one provision, the order remains in effect for the duration of the litigation or until vacated by the court. Some lawsuits can last for years, and the assets could be frozen for as long as the suit goes on.
Bear in mind that the UAFOA acts like an injunction. Target defendants and non-parties must bear the onerous burdens described above knowing that any violation may bring about a finding of contempt.
In 2013, the UAFOA has been introduced in North Dakota, Colorado and the District of Columbia, and it has sponsors ready to introduce it elsewhere. The North Dakota Senate defeated the bill, and the bill was withdrawn in Colorado before coming up for a vote. The District of Columbia city council has not yet voted on the bill. Before any legislative body passes the UAFOA, it ought to consider and examine the UAFOA’s flaws.