By John J. Harmon, Esq.
A Delaware bankruptcy court recently addressed[1] the circumstances under which a debtor or trustee asserting fraudulent transfer claims may obtain a preliminary injunction to freeze a transferee’s assets without violating the Supreme Court’s ruling in Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc.[2] that federal courts lack authority to issue preliminary injunctions under F.R.C.P. 65 in aid of a claim for money damages. The Chapter 11 case, filed by BYJU’s Alpha, Inc. (the “Debtor”), offers a more colorful factual background than most non-crypto Chapter 11 cases. The Debtor is a former subsidiary of BYJU’s, an education technology startup founded in India by Byju Raveendran. The Debtor was formed as a Delaware corporation to raise funds from U.S. credit markets and ostensibly managed by Byju Raveendran’s younger brother Riju Raveendran, who served as its sole director and officer.
BYJU’s was founded in 2011 and by 2022 it was valued at $22 billion.[3] During its meteoric rise, BYJU’s raised over $5 billion in equity and debt. Approximately $1.2 billion of that total was raised by the Debtor via a term loan in November of 2021.
By January of 2024, BYJU’s cut its valuation by over 99% in connection with an attempt to raise an additional $200 million from investors. Raveendram announced that the additional fundraising round was so successful that “[t]his momentum is irreversible, and our comeback is now inevitable.”[4] Shareholders were less optimistic about BYJU’s momentum, and removed Raveendran from his role as CEO before the fundraising round was completed.
Prior to Raveendran’s removal as CEO of BYJU’s, creditors had already taken control of the Debtor. The Debtor defaulted on its $1.2 billion loan in 2022. The Debtor negotiated with its lenders to obtain forbearances. During these negotiations and unbeknownst to the lenders, the Debtor transferred $533 million to Camshaft Capital Fund (“Camshaft”), purportedly as an equity investment in Camshaft.[5] Byju Raveendram later stated to the lenders’ advisors, “the money is someplace the Lenders will never find it.”[6] The lenders did find it, and also found out that Camshaft “was run by an individual in his mid-20’s with little apparent formal financial investment experience, and Camshaft’s business address was listed in a filing with the SEC as being inside an International House of Pancakes—an IHOP.”[7]
The lenders’ agent accelerated the loans, and replaced Riju Raveendran with a new sole director and officer who did not have ties to the Raveendran family. Under new management, the Debtor filed Chapter 11 and initiated an adversary proceeding against Riju Raveendran, Camshsaft and its affiliates seeking a variety of relief including avoiding and recovering the $553 million that the Debtor invested in Camshaft. The Debtor moved for a preliminary injunction to prevent Camshaft from dissipating the $553 million during the pendency of the litigation.[8]
The most significant issue confronting the court was not whether the Debtor satisfied the traditional test for injunctive relief, but whether the court had authority to grant injunctive relief to a creditor that had not yet obtained a judgment. In Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., the Supreme Court held that federal courts lacked authority to issue a preliminary injunction to freeze a defendant’s assets prior to judgment where a plaintiff’s underlying claims fall outside the “equity [jurisdiction] 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.”[9] Additionally, in Granfinanciera, S.A. v. Nordberg, the Supreme Court held that a claim to recover a fraudulent transfer of money constitutes a claim for money damages that falls outside the jurisdiction of equity courts in England at the time of the adoption of the Constitution.[10] The court concluded that “[t]aken together, Grupo Mexicano and Granfinanciera stand for the proposition that there is no right to prejudgment attachment of assets in a fraudulent transfer claim that only seeks monetary damages.”[11]
Notwithstanding the potential obstacle posed by Grupo Mexicano and Granfinanciera, the court found two grounds to authorize injunctive relief.[12]
First, the court observed that Grupo Mexicano left open a possibility that a party could seek injunctive relief pursuant to F.R.C.P. 64 to the extent the law of the state in which the district court is located provides for injunctive prejudgment remedies.[13] The court took notice that Uniform Fraudulent Transfer Act enacted by Delaware expressly permits a plaintiff to obtain prejudgment injunctive relief against a transferee of a debtor’s property.[14]
Second, the court held that where a plaintiff’s complaint contains at least one claim for equitable relief, a court may grant a preliminary injunction to freeze funds that were allegedly fraudulently transferred.[15] The court found the Debtor’s claim against Riju Ravindran for breach of fiduciary duty was an inherently equitable claim, and further found that the Debtor’s complaint implicitly stated a claim for the equitable remedy of an accounting: “the Debtor’s complaint sufficiently alleges a dispute over the location of the Debtor’s missing funds to imply accounting as an equitable remedy.”[16]
Relying on these two exceptions to Grupo Mexicano’s prohibition on prejudgment injunctive relief, the court concluded it had authority to order prejudgment injunctive relief against the defendants.
After concluding it had authority to issue an injunction prior to judgment, the court had no difficulty finding that the Debtor satisfied the traditional test for injunctive relief.[17] The Debtor was likely to succeed on the merits of its fraudulent transfer claim because Riju Ravindran, the Debtor’s sole director and officer when the transfer was made, “testified that he had no idea why he was transferring money to Camshaft, that he had never heard of Camshaft, and that he did not conduct any due diligence before authorizing the transfers.”[18] The court found the Debtor would be irreparably harmed in the absence of injunctive relief because “[t]he missing $533 million is likely the Debtor’s only way to pay its creditors.”[19]
This opinion serves as a reminder that a plaintiff preparing a complaint to recover a fraudulent transfer is well advised to include any potential claims that traditionally sounded in equity as well as fraudulent transfer claims under state law in order to preserve the option to seek a preliminary injunction freezing transferred assets prior to a final judgment.
[1] BYJU’s Alpha, Inc. v. Camshaft Capital Fund, LP (In re BYJU’s Alpha, Inc.), Nos. 24-10140 (JTD), 24-50013 (JTD), 2024 Bankr. LEXIS 823 (Bankr. D. Del. Apr. 3, 2024).[2] 527 U.S. 308, 333 (1999).
[3] https://techcrunch.com/2024/01/29/byjus-seeks-to-raise-200-million-in-rights-issue/
[4] https://techcrunch.com/2024/02/24/byjus-founder-ousted-by-shareholders-says-rumors-of-his-firing-greatly-exaggerated/. Matt Levine observes, “If I ran a company that was once worth $22 billion and is now worth $225 million, I would be hesitant to say things like ‘this momentum is irreversible,’ but I guess that’s why I don’t.” https://www.bloomberg.com/opinion/articles/2024-02-26/honey-i-insider-traded-your-merger
[5] BYJU’s Alpha, Inc., supra, 2024 Bankr. LEXIS at *5.
[6] Id. at *6.
[7] ECF Doc 7 at ¶ 9.
[8] BYJU’s Alpha, supra, at *3-6.
[9] 527 U.S. 308, 333 (1999).
[10] 492 U.S. 33, 46-47 (1989).
[11] BYJU’s Alpha, supra, at *17.
[12] Interestingly, the court acknowledged but declined to rule on the plaintiff’s argument that Bankruptcy Code Section 105(a) provides statutory authority for a bankruptcy court to issue prejudgment injunctive relief.
[13] Id. at *18 (citing Grupo Mexicano, supra, at 330-331).
[14] Id. at *20 (citing Del. Code Ann. tit. 6, § 1307(a)(2)-(3)).
[15] Id. at *20-21 (citing Miller v. Mott (In re Team Sys. Int’l, LLC), 2023 Bankr. LEXIS 229 (Bankr. D. Del. Jan. 31, 2023)).
[16] Id. at *21-22.
[17] Id. at *25-26.
[18] Id. at 28-29.
[19] Id. at *30.
