Court Grants Preliminary Injunction/Attachment Order Directing Party That Spent Disputed Funds To Deposit Equivalent Amount In Segregated Account

On March 18, 2015, Justice Kornreich of the New York County Commercial Division issued a decision in GEM Holdco, LLC v. Changing World Technologies, L.P., New York County Index No. 650841/2013, granting pre-judgment attachment of funds from federal tax credits, including ordering the restrained party to deposit cash in the amount equal to the tax credit funds in a bank account.

[NOTE: Schlam Stone & Dolan is counsel for the former owners of Defendant Changing World Technologies, Inc. ("CWT") in this action, who were the movants]

GEM Holdco relates to a dispute over an investment in a renewable energy company. The motion at issue related to the custody of funds paid by the IRS to defendant CWT because of renewable energy tax credits earned in 2012. Defendant Ridgeline, the current parent company of CWT, had custody of the tax credits. Although Ridgeline did not assert that it owned the tax credit funds, it refused to hand them over to CWT's former owners, claiming that the tax credit were not properly earned and that the funds should be returned to the government. The former owners of CWT filed a motion for a preliminary injunction and/or attachment restraining the tax credit funds. Ultimately, Ridgeline conceded that it had spent the tax credit funds. The court for that reason ordered Ridgeline to place funds in the amount of the already-spent tax credits in a separate bank account and restrained those funds pending determination of the ownership of the tax credits. As the court explained:

CPLR 6201 specifically provides that an attachment may be granted where a plaintiff "would be entitled, in whole or in part . . . to a money judgment against one or more defendants" who are nondomiciliaries or foreign corporations residing outside New York or if the defendant disposes of property with intent to frustrate a judgment that might be rendered in plaintiff's favor. . . . .

It is unclear if Danzik [Ridgeline's CEO] is attempting to transfer assets to a new company to evade the Ridgelinc Parties' creditors' claims or if he is forming a new corporate entity for the purpose of raising additional capital. However, Danzik is a nondomiciliary and Ridgeline is a foreign corporation. Moreover, there is no question of fact that the $3,175,967 in tax credits do not belong to the Ridgeline Parties. The money either belongs to the CWT Parties or the federal government. No matter Ridgeline's liquidity needs, it is not entitled to use this money because, regardless of the outcome of this litigation, Ridgeline will not keep the money. Indeed, Ridgeline's admitted lack of liquidity demonstrates the need to restrain the tax credit funds to ensure that the Ridgeline Parties will be able to satisfy a judgment. This concern is valid, no matter the forum in which the UPA claims are adjudicated.

(Internal quotations and citations omitted). The most significant aspect of this decision is the court's order that Ridgeline, having spent the tax credits it acknowledged it did not own, must put a corresponding amount in a bank account and restraining Ridgeline from using those funds until the ownership of the tax credits is resolved.