Lawsuits take time. And while a case works its way through the justice system, a plaintiff who ultimately wins the lawsuit may nonetheless be denied recovery if the defendant dissipates all its funds during that time. While both state and Federal legal systems provide measures whereby a plaintiff—after having obtained a judgment against defendant—can pursue defendant’s funds for collection, these measures will be of little value if the money is gone by then. Under what circumstances can a Federal court issue an order freezing a defendant’s assets before the plaintiff obtains a judgment, to ensure a meaningful recovery?

The court in a recent Federal case from Texas faced this question. The unfortunate backstory is something out of a tabloid; it involves an alleged romance scam, social media and crypto. The allegations of the complaint are that the female plaintiff was the victim of a “fraudulent paramour scheme.” She met one of the individual defendants online through the popular dating service Tinder, and communicated with him frequently via the messaging app WhatsApp. What developed appeared to plaintiff to be a deeply-held affection for, and interest in, one another. This defendant allegedly made false promises of romance and of financial prosperity through crypto investments, thereby inducing plaintiff into making monetary transfers with financially devastating results. In all, plaintiff was allegedly duped into transferring over $8,000,000 of fiat and crypto to defendant. Plaintiff seeks to recover this money by her lawsuit.

Again, seeing her lawsuit to completion will not happen overnight. And so the plaintiff requested that the court immediately issue an order freezing one defendant’s assets (crypto accounts and wallet addresses) that the plaintiff traced using blockchain analytics. Plaintiff’s request implicated the principles set out in two Supreme Court decisions—Deckert v. Independence Shares Corp., 311 U.S. 282 (1940), and Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, 527 U.S. 308 (1999).

In Grupo, investors suing an insolvent note issuer over its default sought a pre-judgment order freezing its assets, to prevent it from transferring them away before the investors could win their lawsuit. To answer the question of whether such relief was available, the Court conducted a historical inquiry into the power modern Federal courts derive from the traditional “equity” jurisdiction of English courts. The concept of “equity” jurisdiction is too involved to fully discuss here. But as one commentator describes it: “[E]quity is that portion of the law which was developed by the English and American courts of Chancery … for the purpose of meliorating any harsh or otherwise undesirable effects resulting from the strict application of any particular rule of law.” Thus, a court applying equitable principles could craft “exceptions to the application of rules of law in those cases where the law, by reason of its universality, would create injustice.”

Writing for the Grupo majority, Justice Scalia first explained that “the equity jurisdiction of the federal courts is the jurisdiction in equity exercised by the High Court of Chancery in England at the time of the adoption of the Constitution and the enactment of the original Judiciary Act, 1789.” As such, whether the requested asset freeze was available turned on whether such relief “was traditionally accorded by courts of equity.”

In this regard, the “general rule [was] that a judgment establishing the debt was necessary before a court of equity would interfere with the debtor’s use of his property.” In other words, a court could not prevent a defendant from disposing of his assets until first the plaintiff won her lawsuit and obtained a judgment against defendant. As support, the Grupo majority quoted from Justice William Story’s 1846 Commentaries on Equity Jurisprudence that notwithstanding equity’s purpose, as mentioned above, to “abate the rigor of the common law,” this form of prejudgment attachment was beyond its power.

The Grupo Court, however, clarified that this general bar to pre-judgment relief did not apply when the final relief sought in the case was itself equitable in nature. Thus, in the 1940 Deckert case, granting a pre-judgment asset freeze was proper because the plaintiffs sought “rescission”—whereby a contract is extinguished as if it never existed and the plaintiff obtains return of what she paid for it—an equitable remedy. But because the plaintiffs in Groupo did not seek equitable relief, rather the “legal” relief of money damages, the asset freeze was unavailable to them.

Turning back to the Texas case, the court examined the plaintiff’s requested relief to determine if it was equitable or legal in nature, and thus under the ambit of either Deckert or Grupo. Finding that plaintiff was seeking the purely legal remedy of “damages, including principal, interest, lost profits, and expenses,” the court ruled the request for a pre-judgment asset seizure was barred by Grupo.

Interesting to see the law of old England applied to a dispute involving some high-tech assets. Justice Story could never have foreseen that his pronouncements on equity jurisprudence would be applied to cryptocurrency wallets. But at the same time, many of the problems of the ancient law are still the problems of today. As the Grupo court observed, “there is absolutely nothing new about debtors’ trying to avoid paying their debts.”