Teradyne, Inc. v. Mostek Corp.

Defendant-appellant, Mostek Corporation (Mostek), now known as CTU of Delaware, Inc., appeals from a district court interlocutory order issued in favor of plaintiff-appellee, Teradyne, Inc. (Teradyne), in an ongoing breach of contract action by Teradyne against Mostek. The order enjoins Mostek from disposing of or encumbering $4,000,-000 of its assets and directs it to set that amount aside in an interest bearing account to satisfy any judgment or arbitration *45 award obtained by Teradyne. Teradyne is claiming approximately $3,500,000 for cancellation charges, alleged failure to pay unearned price discounts on goods delivered, for goods and services invoiced, and for incidental and consequential damages. Alternatively, it seeks damages computed under the Uniform Commercial Code (U.C.C.) for lost profits, incidental and consequential damages. Teradyne has posted a $25,000 bond as directed by the district court’s order.

Mostek’s appeal raises three issues: (1) whether the district court’s order should be treated as a nonappealable attachment order or as a preliminary injunction appeal-able under 28 U.S.C. § 1292(a)(1); 1 (2) whether the district court lacked power because of the Federal Arbitration Act, 9 U.S.C. §§ 1-14, to issue the order; and (3) whether the court abused its discretion in issuing the order.

Mostek manufactured, designed and marketed semiconductor components for use in computers, telecommunications equipment and other end products. Teradyne manufactures laser systems (sometimes called memory repair systems) and memory testers, both of which were key to Mostek’s manufacturing operations.

The present dispute erupted when, on May 24, 1985, Mostek cancelled orders for memory testers and laser systems it had given Teradyne and then cancelled a second set of orders on July 25,1985. When Teradyne proceeded to demand cancellation charges assessed at 70% of the original purchase price, Mostek refused to pay. On September 26, 1985, Teradyne, relying on an arbitration clause in the contract, filed a demand for arbitration against Mostek with the American Arbitration Association. Mostek opposed that demand.

Changes in Mostek’s corporate status complicated matters when United Technologies Corporation, which had acquired Mostek in 1980, announced, on October 17, 1985, that Mostek would cease operations. On October 30, United and Mostek entered into a Memorandum of Understanding with Thomson Semiconductors, Inc., under which Thomson agreed to buy substantially all of Mostek’s assets for approximately $71 million in cash, subject to certain offsets and debits. The sale was executed in November and Teradyne was contemporaneously notified that it had occurred. The proceeds of the sale were deposited in a separate bank account in Mostek’s name and dedicated to the payment of the claims of Mostek’s creditors. Prompted by this change in Mostek’s status, Teradyne commenced this action on January 17, 1986, seeking, inter alia, an injunction requiring Mostek to set aside sufficient funds to satisfy a Teradyne judgment pending the outcome of arbitration.

I. THE APPEALABILITY OF THE DISTRICT COURT’S ORDER

Trustees of Hospital Mortgage Group v. Compania Aseguradora, 672 F.2d 250 (1st Cir.1982), is the only case in this circuit bearing on the question of whether an interlocutory order which is similar in effect to an attachment should be treated as a nonappealable attachment or a preliminary injunction appealable under 28 U.S.C. § 1292(a)(1). 2 That case involved an action by the plaintiff trustees to foreclose *46 on a mortgage on certain plots of land. The district court issued an order requiring the defendant to either post a bond of $67,167.09 with the court securing its mortgage liability or satisfy its property tax liability on the mortgaged realty and repay the plaintiffs for taxes advanced on the defendant’s behalf. The defendant appealed, contending that the order was an abuse of the district court’s discretion. We held that the order was not appealable; that it was not an injunction under 28 U.S.C. § 1292(a)(1) because it did not constrain the defendant in any way beyond restricting its use of the bond money during the pendency of the litigation. 672 F.2d at 251. We noted that allowing such “minimally coercive orders” to be appealed as injunctions under § 1292(a) would make any order relating to a bond immediately appealable, and held the appellant’s situation “indistinguishable from that of the subject of an attachment order.” Id.

We find that the order in the present case is distinguishable from the order in Compañía Aseguradora for three reasons. First, the order here is more than “minimally coercive.” The tying up of four million dollars pending the outcome of arbitration proceedings is a significant constraint, the fact that it can be put in an interest bearing account notwithstanding. Second, although we recognize that the label used by the parties in the district court cannot control appealability, see 16 Wright, Miller, Cooper & Gressman, Federal Practice and Procedure § 3922 at 32 (1977), we think it significant that the district court and the parties treated the order as a preliminary injunction. Teradyne specifically asked for injunctive relief and the order followed two temporary restraining orders in Teradyne’s favor. Moreover, the court described the order as a preliminary injunction in its memorandum and granted the order on the basis of its findings that Teradyne had met the prerequisites for injunctive relief. Third, and we think this is the most compelling reason, this case, unlike Compañía Aseguradora, does not merely involve posting a bond or surrendering property for attachment. Here, as with a traditional injunction, Mostek has been ordered to refrain from certain conduct and to affirmatively take certain action. We think it advisable, however, to look beyond our own circuit for guidance.

The Second Circuit has discussed this issue definitively in at least two cases. In Inter-Regional Financial Group, Inc. v. Hashemi, 562 F.2d 152 (2d Cir.), cert. denied, 434 U.S. 1046, 98 S.Ct. 892, 54 L.Ed.2d 798 (1978), it held that an order directing defendant to deliver certain stock certificates to the custody of the the clerk as security for any judgment was appeal-able pursuant to 28 U.S.C. § 1292(a)(1). The court treated the order as an injunction because the defendant was required to bring the certificates to the clerk from outside the venue state of New York, as “a necessary step preceding the actual attachment.” Id. at 154. The case of In re Feit & Drexler, Inc., 760 F.2d 406 (2d Cir.1985), concerned an order prohibiting an individual and those holding property for her or acting in concert with her from transferring or disposing of any of the individual’s property except on order of the court , and ordering her, her agents and employees and those holding property for her or acting in concert with her to deliver her property to her attorney who was to hold the property in safekeeping pending further order of the district court. The court saw no basis for distinguishing this order from the order held appealable in Hashemi. Id. at 412.

The Seventh Circuit reached a different conclusion in Rosenfeldt v. Comprehensive Accounting Service Corporation, 514 F.2d 607 (7th Cir.1975). In an opinion authored by Judge (now Justice) Stevens, it held that an order directing plaintiffs to deliver to defendants all accounts/clients, accounts receivable, books, records, files and work papers and restraining plaintiffs from certain specific activities was not appealable. The court held that the motion “was, in effect, a petition for a writ of attachment or replevin pursuant to Federal Rule of Civil Procedure 64” and stressed that it was so treated by the parties and the dis *47 trict court. Id. at 609. Rosenfeldt has been criticized for not recognizing that the order had all of the ingredients of an injunction. See 16 Wright, Miller, Cooper & Gressman, Federal Practice and Procedure § 3922 at 44. A close reading of Judge Steven’s opinion, however, suggests that he was influenced by the particular circumstances of the case and the consequences of allowing an appeal. He pointed out that holding the order appealable would result in disparate treatment of secured parties contrary to the pertinent provisions of the Uniform Commercial Code. 514 F.2d at 610.

The question of whether an interlocutory order which has the attributes of both an attachment and an injunction should be treated for appeal purposes as an attachment or an injunction depends upon the terms of the order. Factors to be considered are: the present and future consequences of the constraint involved; whether the order directs or restrains conduct of one of the parties; how the order was treated below by the district court and the parties. Considering all of these factors, we hold that the district court’s order should be treated as a preliminary injunction appealable under § 1292(a)(1).

II. THE EFFECT OF THE FEDERAL ARBITRATION ACT, 9 U.S.C. §§ 1-14, ON THE DISTRICT COURT’S POWER TO GRANT PRELIMINARY INJUNCTIVE RELIEF

Mostek contends that the policy of the Arbitration Act precludes the grant of preliminary injunctive relief in an arbitrable dispute. The district court has not yet determined whether or not this dispute is arbitrable. If Mostek’s argument is correct, then it clearly would have been an abuse of discretion for the court to issue this injunction before deciding the arbitrability question. If Mostek’s argument is not correct, however, and the Arbitration Act poses no bar to the grant of a preliminary injunction, then whether or not the dispute is arbitrable is irrelevant. Accordingly, the initial question to be determined is whether or not a preliminary injunction can be issued in an arbitrable dispute.

The Arbitration Act does not address this issue specifically and it has not previously been ruled upon by this circuit. Other circuits, however, have examined the issue in some detail. The Second, Fourth and Seventh Circuits all take the view that a court can, and should, grant a preliminary injunction in an arbitrable dispute whenever an injunction is necessary to preserve the status quo pending arbitration.

In Roso-Lino Beverage Distributors, Inc. v. The Coca-Cola Bottling Company of New York, 749 F.2d 124 (2d Cir.1984), the Second Circuit reversed the district court’s denial of a preliminary injunction because it “appear[ed], from the record ..., that the district court believed its decision to refer the dispute to arbitration stripped the court of the power to grant injunctive relief.” Id. at 125. Relying on its decision in Erving v. Virginia Squires Basketball Club, 468 F.2d 1064 (2d Cir.1972), the Second Circuit held that the fact that the dispute was to be arbitrated did not “absolve the court of its obligation to consider the merits of a requested preliminary injunction,” and that the proper course for the district court was to determine whether the dispute was a “proper case” for an injunction. 749 F.2d at 125.

Erving v. Virginia Squires Basketball Club, 468 F.2d 1064, involved a suit by a basketball player for rescission of his contract with a professional club. The club counterclaimed, asserting a right to arbitration, and sought injunctive relief. The district court granted a preliminary injunction enjoining the plaintiff from playing for any other club pending determination of the dispute by arbitration. The Second Circuit affirmed, noting that the injunction was the only way to preserve the status quo during the pendency of the arbitration proceeding. Id. at 1067.

The Fourth Circuit’s examination of this issue, in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bradley, 756 F.2d 1048 (4th Cir.1985), focused on the effect of § 3 of the Arbitration Act on the court’s power to *48 issue preliminary injunctive relief. Section 3 provides that the court shall, upon determination that a dispute is arbitrable, and on application of one of the parties, “stay the trial of the action until such arbitration has been had.” 3 Merrill Lynch sued Bradley, a former account executive, for damages for alleged breach of contract, and sought injunctive relief to prevent Bradley from using its records and soliciting its clients. The district court granted Merrill Lynch a preliminary injunction, denied Bradley’s motion to stay the injunction, and ordered expedited arbitration, both parties having agreed that the dispute was arbitrable. Bradley appealed, claiming that the injunction was an abuse of discretion because § 3 of the Arbitration Act precluded a court from considering the merits of an arbitrable dispute. The Fourth Circuit rejected this argument, holding that nothing in § 3 abrogated the equitable power of district courts to enter preliminary injunctions to preserve the status quo pending arbitration. Id. at 1052. The court also stated that it thought its decision would further rather than frustrate the policies underlying the Arbitration Act by ensuring that the dispute resolution would be a meaningful process. Id. at 1054.

The issue was addressed by the Seventh Circuit in Sauer Getriebe KG v. White Hydraulics, Inc., 715 F.2d 348 (7th Cir. 1983), cert. denied, 464 U.S. 1070,104 S.Ct. 976, 79 L.Ed.2d 214 (1984). The dispute in that case arose when the defendant announced that it was negotiating for the sale of its assets. The plaintiff claimed this announcement amounted to a repudiation of a previous agreement the defendant had made with the plaintiff to buy certain of the defendant’s manufacturing rights. The complaint alleged that plaintiff intended to exercise its contractual right to arbitrate the dispute and contained a request for a preliminary injunction barring the defendant from transferring any manufacturing rights pending the arbitration. The district court denied injunctive relief on the grounds that the defendant had not repudiated the contract. The Seventh Circuit reversed. In doing so, it expressly rejected the defendant’s argument that the plaintiff had waived its right to arbitrate by filing the suit. The court held that the right to arbitrate and to seek injunctive relief were not incompatible and that the plaintiff was not obliged to abandon one in order to pursue the other. 715 F.2d at 350. It held, further, that the plaintiff was entitled to an injunction pending the arbitration, noting that the plaintiff’s contractual right to arbitrate the dispute would not be worth much if the defendant transferred the manufacturing rights before the arbitration was settled. Id.

Running counter to the approach taken by the Second, Fourth and Seventh Circuits is that taken by the Eighth Circuit in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Hovey, 726 F.2d 1286 (8th Cir.1984), a case which the Fourth Circuit in Bradley expressly refused to follow. Hovey involved a petition by Merrill Lynch for an injunction against five former employees to prevent them from using Merrill Lynch’s records and from soliciting Merrill Lynch clients. The employees counterclaimed, seeking to compel arbitration pursuant to New York Stock Exchange rules regulating dispute resolution procedures. The district court granted Merrill Lynch a preliminary injunction and refused to submit the dispute to arbitration. The employees appealed, claiming that the dispute was arbitrable. The Eighth Circuit held that the dispute was arbitrable and that issuing a preliminary injunction was, therefore, precluded by § 3 of the Arbitration Act. The *49 court took the view that granting preliminary injunctive relief in an arbitrable dispute ran counter to the “unmistakably clear congressional purpose that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts.” Id. at 1292 (quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270 (1967)).

In support of this holding, the Eighth Circuit cited Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 22, 103 S.Ct. 927, 940, 74 L.Ed.2d 765 (1983) (the congressional intent of the Arbitration Act was to facilitate quick, expeditious arbitration); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), and Buffalo Forge Co. v. United Steelworkers of America, AFL-CIO, 428 U.S. 397, 412, 96 S.Ct. 3141, 3149-50, 49 L.Ed.2d 1022 (1976) (courts should not involve themselves in the merits of issues more appropriately left to arbitration). The Eighth Circuit construed these cases as “compelling authority to hold that, where the Arbitration Act is applicable and no qualifying contractual language has been alleged, the district court errs in granting injunctive relief.” 726 F.2d at 1292. After careful consideration of the authorities relied upon by the Eighth Circuit, we conclude that they do not compel the conclusion that injunctive relief cannot issue in an arbitrable dispute. The question at issue in Moses H. Cone Memorial Hospital, 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 was whether the federal district court should grant a stay of an action to compel arbitration out of deference to parallel litigation pending in state court. The defendant Hospital had moved for a declaratory judgment in state court, seeking a declaration that the dispute was not arbitrable. The plaintiff construction company then filed suit in federal court seeking an order compelling arbitration under § 4 of the Arbitration Act, which provides in pertinent part that a court must enter an order to arbitrate “upon being satisfied that the making of the agreement to arbitrate or the failure to comply therewith is not in issue.” 4 On the Hospital’s motion, the federal court stayed the federal suit pending resolution of the state court proceeding because both suits involved the identical issue of the arbitrability of the claims. The court of appeals reversed the stay order and remanded with instructions to enter an order to arbitrate. The Supreme Court affirmed, holding the district court’s refusal to proceed erroneous “in view of Congress’ clear intent, in the Arbitration Act, to move the parties to an arbitrable dispute out of court and into arbitration as quickly as possible.” 460 U.S. at 22, 103 S.Ct. at 940. The Court noted that the Act “provides two parallel devices for enforcing an arbitration agreement: a stay of litigation in any case raising a dispute referable to arbitration, 9 U.S.C. § 3, and an affirmative order to engage in arbitration, § 4,” and that both provisions call for *50 “an expeditious and summary hearing, with only restricted inquiry into factual issues.” Id. It held that even if the state court did grant the construction company prompt relief under the Act, there still would have been a delay as a result of the district court’s stay and that the stay thus “frustrated the statutory policy of rapid and unobstructed enforcement of arbitration agreements.” Id. at 23, 103 S.Ct. at 941. The issue in the present case is materially different from that in Moses H. Cone. The stay reversed there differed both in purpose and effect from the preliminary injunction here and we see nothing in the Supreme Court’s reasoning to indicate that the Court would be opposed to the issuance of an order designed to preserve the meaningfulness of an arbitration agreement.

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 involved an action for rescission of a contract based on alleged fraud in the inducement by the defendant, Flood & Conklin. Prima Paint’s contention was that defendant had fraudulently represented it was solvent and able to perform whereas it was insolvent and planned to file for bankruptcy shortly after execution of the contract. Prior to filing suit, plaintiff notified defendant that it deemed it to have breached the contract. Defendant responded by filing a notice of intention to arbitrate, whereupon plaintiff filed suit in federal court for rescission and to enjoin defendant from proceeding with arbitration. The district court issued a stay of the action on the ground that the charge of fraud in the inducement was a question for the arbitrator and not for the court. The Second Circuit dismissed Prima Paint’s appeal holding that a claim of fraud in the inducement generally, not directed to the arbitration clause itself, was for the arbitrator and not for the court. The Supreme Court affirmed.

The Court held that, in passing upon an application for a stay under § 3 of the Act, the scope of a court's inquiry was the same as the scope of inquiry afforded the court under § 4 when ruling upon whether the making of the agreement for arbitration is in issue. 5 388 U.S. at 403, 87 S.Ct. at 1805-06. It ruled that § 4 would allow a court to adjudicate fraud in the inducement of the arbitration clause itself but not to adjudicate claims of fraud in the inducement generally, and that in considering a § 3 application, a court should likewise consider only issues relating to the making and performance of the agreement to arbitrate. Id. at 403-04, 87 S.Ct. at 1805-06. “In so concluding,” the Court stated, “we not only honor the plain meaning of the statute but also the unmistakably clear congressional purpose that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts.” Id. at 404, 87 S.Ct. at 1806. Again, we see no incompatibility between the Court’s language and the availability of preliminary injunctive relief to preserve the meaningfulness of the arbitration process. The risk that the arbitrator will be unduly influenced by the court’s prior ruling is offset by the necessity of preserving the status quo.

The third Supreme Court case relied on by the Eighth Circuit, Buffalo Forge Co. v. United Steelworkers of America, 428 U.S. 397, 96 S.Ct. 3141, 49 L.Ed.2d 1022 involved a petition by an employer for injunctive relief enjoining an ongoing work stoppage pending arbitration and the arbitrator’s decision as to whether the stoppage was permissible under the no-strike clause of the collective bargaining agreement. The district court refused injunctive relief on the basis of § 4 of the Norris LaGuardia Act, 29 U.S.C. § 104, which imposes an express ban on federal court injunctions in labor disputes. The employer argued that the court was empowered to grant the injunction pursuant to § 301(a) of the Labor Management Relations Act of 1947, 29 U.S.C. § 185(a), as construed in an earlier Supreme Court decision, Boys Markets, Inc. v. Retail Clerks Union, Local 770, 398 U.S. 235, 90 S.Ct. 1583, 26 L.Ed.2d 199 *51 (1970), which constituted an exception to the ban of the Norris LaGuardia Act. 6 The Second Circuit affirmed the denial of injunctive relief, as did the Supreme Court. 428 U.S. at 413, 96 S.Ct. at 3150. The Court held that the strike did not come within the Boys Markets exception and refused to undercut the policy of the Norris LaGuardia Act by extending that exception at the risk of involving the courts in a wide range of arbitrable disputes over collective bargaining agreements. The Arbitration Act contains no express ban such as that in § 4 of the Norris LaGuardia Act, and we believe that the difference in the policy considerations underlying both Acts warrants a different approach to the availability of preliminary injunctive relief in actions in which either Act is involved.

Having thus outlined our disagreement with both the reasoning and approach of the Eighth Circuit, we are persuaded that the approach taken by the Second, Fourth and Seventh Circuits should be followed. We hold, therefore, that a district court can grant injunctive relief in an arbitrable dispute pending arbitration, provided the prerequisites for injunctive relief are satisfied. We believe this approach reinforces rather than detracts from the policy of the Arbitration Act, which was most recently described by the Supreme Court in Dean Witter Reynolds v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985): “passage of the Act was motivated first and foremost by a Congressional desire to enforce [arbitration] agreements into which parties had entered.” 470 U.S. at-, 105 S.Ct. at 1242. 7 We believe that the congressional desire to enforce arbitration agreements would frequently be frustrated if the courts were precluded from issuing preliminary injunctive relief to preserve the status quo pending arbitration and, ipso facto, the meaningfulness of the arbitration process. Accordingly, we hold that it was not error for the district court to issue the preliminary injunction before ruling on the arbitrability of this dispute. We next consider whether Teradyne established the prerequisites for such relief.

III. THE PROPRIETY OF PRELIMINARY INJUNCTIVE RELIEF

In Planned Parenthood League of Massachusetts v. Bellotti, 641 F.2d 1006 (1st Cir.1981), we listed four criteria that must be established to warrant preliminary injunctive relief. The court must find: (1) that plaintiff will suffer irreparable injury if the injunction is not granted; (2) that such injury outweighs any harm which granting injunctive relief would inflict on the defendant; (3) that plaintiff has exhibited a likelihood of success on the merits; *52 and (4) that the public interest will not be adversely affected by the granting of the injunction. The decision to grant or deny a preliminary injunction is a matter for the discretion of the district court and is reversible only for an abuse of discretion. The district court’s decision will be reversed, however, if it is found to have applied an improper legal standard in determining the likelihood of success on the merits or if it has misapplied the law to the particular facts in issue. Id. at 1009.

The district court here clearly articulated its reasons for finding that Teradyne had satisfied the prerequisites for injunctive relief. It held that Mostek’s freedom to dispose of its assets created a substantial risk of irreparable harm to Teradyne, given that Mostek was in the process of winding down after selling the bulk of its assets, that it had failed to provide adequate assurances to alleviate Teradyne’s concerns, and that it could at any time make itself judgment proof. Further, the court found that the affidavits submitted to it showed a likelihood that Teradyne would succeed on its contractual claims, and that the balance of hardships was in Teradyne’s favor. The court dismissed Mostek’s claims that the injunction would create a ripple effect whereby the creditors would rush to court seeking similar relief, noting that the injunction would have no precedential effect on other disputed claims, and that Mostek could pay undisputed claims and thereby avoid any possible ripple effect on them. Mostek disputes all of the district court’s findings. For ease of review, we will examine the court’s findings on each criterion for preliminary injunctive relief separately. As there is no suggestion that the public interest was adversely affected by the injunction, that criterion is not relevant here.

A. The Probability of Irreparable Harm to Teradyne and the Inadequacy of Legal Remedies

Mostek contends that preliminary injunctive relief restraining the transfer of assets may not be granted in cases where monetary damages are available except in extraordinary circumstances. The question raised here is whether injunctive relief restraining the transfer of assets can be granted when the district court finds that the defendant may be insolvent before a final judgment is entered and, if so, whether such a finding was warranted in the circumstances of this case. The Supreme Court has held that a preliminary injunction, designed to freeze the status quo and protect the damages remedy is an appropriate form of relief when it is shown that the defendant is likely to be insolvent at the time of judgment. Deckert v. Independence Shares Corporation, 311 U.S. 282, 61 S.Ct. 229, 85 L.Ed. 189 (1940).

The facts of that case are analogous to the present, although somewhat more complex. The petitioners in Deckert were the owners of savings certificates purchased from Capital Savings Plan, Inc., which then merged with Independence Shares Corporation (Independence). The certificates required the holders to make installment payments to the Pennsylvania Corporation for Insurances on Lives and Granting Annuities (Pennsylvania). Pennsylvania, after deducting certain fixed charges, used the balance of these installment payments to purchase Independence Trust shares for the benefit of the certificate holders. Independence Trust shares, issued by Pennsylvania, represented interests in a trust of common stock of forty-two American corporations, deposited by Independence with Pennsylvania. Pursuant to a trust agreement between Pennsylvania and Independence, Pennsylvania collected dividends and profits from the stocks and administered the trust.

The petitioners sued Pennsylvania, Independence, and two affiliated companies, alleging that Independence and its predecessor, Capital Savings Plan, were guilty of fraudulent misrepresentations. They alleged, further, that Independence was insolvent and threatened with many lawsuits, that its business was virtually at a standstill, that preferences to creditors were probable, and that Independence’s assets were in danger of dissipation. In addition to other relief, the petitioners asked for an *53 injunction restraining Pennsylvania from transferring or disposing of any of the assets of the corporations or of the trust. The district court granted the injunction, the court of appeals vacated it, and the Supreme Court reinstated it. The Court held that the legal remedy against Independence without recourse to the funds in the hands of Pennsylvania appeared inadequate in light of the allegations that Independence was insolvent and its funds in danger of depletion, and that the injunction was, therefore, “a reasonable measure to preserve the status quo pending final determination of the questions raised by the bill.” 311 U.S. at 290, 61 S.Ct. at 234.

Several circuit courts have also recognized the propriety of injunctive relief in such circumstances. See Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380, 386 (7th Cir.1984) (the requirement that a plaintiff seeking a preliminary injunction show that an award of damages will be inadequate does not require a showing that damages will be wholly ineffectual, it is sufficient if damages will for some reason be seriously deficient as a remedy for the harm suffered, for example, because the defendant may become insolvent before a final judgment can be entered and collected); Productos Carnic, S.A. v. Central American Beef and Seafood Trading Co.,