The Arizona Court of Appeals, Division One holds that the superior court’s award of a writ of attachment, writ of garnishment, and prejudgment discovery into assets was erroneous under the circumstances.

A bank and trust (the “Bank”) lent money to a limited liability company (the “Company”) pursuant to a loan agreement. The founders and majority shareholders of the Company (the “Shareholders”) separately executed guaranty agreements guaranteeing to repay the amounts due to the Bank under the loan agreement. The Company later filed for bankruptcy. The Bank sued the Shareholders in superior court, seeking to recover all sums due under the loan agreement.  The Bank filed an application seeking the provisional remedies of attachment and prejudgment garnishment and requested leave to conduct discovery into the Shareholders’ assets (the “Application”). The superior court held a hearing and granted the Application, finding the Bank entitled to the provisional remedies of attachment and non-earnings garnishment upon posting a bond, and granting the Bank leave to conduct discovery into the Shareholders’ assets. The Shareholders sought relief from the ruling by special action.

The Arizona Court of Appeals accepted special action jurisdiction, noting the freezing of the Shareholders’ assets posed a risk of irreparable harm to the Shareholders. The Court explained that the requirement to post a bond is an imperfect safeguard against loss in the event of an erroneous grant of prejudgment writs, citing examples of damages that could not be undone, such as clouded title or tainted credit rating. The Court then turned to the parties’ arguments.

The Court rejected the Shareholders’ argument that the Bank’s claim against the Company in its bankruptcy proceeding precluded the Bank from simultaneously seeking relief from the Shareholders. The Court also held that, although an application for provisional remedies must be supported by affidavit, the failure to file the affidavit and application contemporaneously, though a procedural misstep, does not require that the application be denied. 

The Court then held that the superior court’s grant of a writ of attachment, writ of garnishment, and leave to conduct discovery into the Shareholders’ asserts was improper and vacated the superior court’s orders.  

Turning first to the request for a writ of attachment, the Court held that such a request pursuant to A.R.S. § 12-2403 may not be granted unless (1) the party seeking the remedy strictly complies with the statutory requirements to obtain the provisional remedy; (2) the party files and serves an application and notice; and (3) the party against whom the provisional remedy is sought has been afforded an opportunity for a hearing. The Court explained that the Bank failed to satisfy the first requirement under § 12-2403 by neglecting to provide an affidavit showing statutory grounds for issuance of the writ, as required by A.R.S. § 12-1522.  Rather, the affidavit offered nothing more than conclusions lacking personal knowledge and failed to show any of the requirements for attachment. The Court also rejected the Bank’s argument that the superior court’s hearing under the third prong cured any deficiency under the first prong, noting that strict statutory compliance and the opportunity for a hearing are distinct elements under A.R.S. § 12-2403 that must each be met.

Next, the Court held that an entitlement to the provisional remedy of garnishment requires satisfaction of A.R.S. § 12-1572, which mandates that an application contain a statement that the applicant has good reason to believe that the garnishee holds nonexempt personal property belonging to the judgment debtor. The Court found that, because the Bank’s submission lacked such a statement, the superior court’s award of the provisional remedy of garnishment was unsupported.

Finally, the Court held that the award of prejudgment discovery into the Shareholder’s assets was also erroneous, declaring the mere fact that a party has been granted a provisional remedy, without more, does not entitle the party to conduct discovery into its adversary’s assets or financial condition. While the Court explained that such discovery might be appropriate where (1) the adversary’s assets are relevant to any claim or defense or (2) evidence suggests the adversary is concealing or disposing of assets to thwart collection on a future judgment, the Bank made no showing in support of either exception.

Judge Kiley authored the opinion, in which Judges Brown and Williams joined.

Posted by: BriAnne Illich Meeds