Travelers Casualty and Surety Company of America v. W.P. Rowland Constructors Corporation et al

Filing 45

ORDER, denying the remainder of plaintiff's motion for preliminary injunction 14 ; Plaintiff's requests that defendants be required to deposit $1,303,088 as collateral and that defendants be prohibited from secreting or diverting asse ts are denied; the injunction ordering defendants to use contract proceeds from bonded projects to pay bonded debts to claimants who have properly perfected a valid bond claim is affirmed 42 ; this denial is without prejudice to the right of plaintiff to file a motion showing it is entitled to preliminary injunctive relief under federal standards. Signed by Judge Frederick J Martone on 5/15/12. (REW)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Travelers Casualty & Surety Co. of)
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America,
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Plaintiff,
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vs.
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W.P. Rowland Constructors Corp.; W.P.)
Rowland Properties Corp.; R.L.H.)
Associates LLC; RCCG Management Inc.;)
Rowland Companies-Western Inc.;)
Rowland Companies-Southwest Inc.;)
Rowland Companies-Central Inc.;)
Rowland Constructors Group Inc.;)
Rowland Companies Construction Group)
Inc.; Rowland Texas GP; Rowland Texas)
LP; Rowland Companies Southeast Inc.;)
W.P. Rowland Enterprises LP; 8324 E.)
Hartford Drive LLC; WLR Trust I; BKR)
Trust I Dated 9/1/05; Linda L. Rowland;)
James B. Rowland; Kimberly A. Rowland;)
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William P. Rowland,
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Defendants.
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CV 12-00390-PHX-FJM
ORDER

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The court has before it plaintiff's motion for preliminary injunction (doc. 14). The
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entity defendants responded (doc. 32), and the individual and trust defendants joined in the
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response (doc. 34). Initially, plaintiff did not file a reply. On April 16, 2012, we ordered
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defendants to file a memorandum addressing the citizenship of the LLC and partnership
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defendants (doc. 42). In addition, because defendants did not object to plaintiff's request for

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an injunction requiring defendants to use contract proceeds from bonded projects to pay

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bonded debts, we granted in part plaintiff's motion for preliminary injunction. We reserved

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ruling on the remainder of the motion and ordered plaintiff to file a reply. Defendants filed

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their memorandum of citizenship (doc. 43) and plaintiff filed its reply (doc. 44) in

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accordance with our order.

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After review of the record, we are satisfied that there is complete diversity between

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the parties and find that an evidentiary hearing is not needed to resolve the remainder of

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plaintiff's motion for preliminary injunctive relief.

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In October 2010, defendants William Rowland, Linda Rowland, James Rowland,

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Kimberly Rowland, Rowland Constructors Group, RCCG Management, Roland

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Companies-Western, Roland Companies-Southwest, Roland Companies-Central, W.P.

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Rowland Constructors, R.L.H. Associates, LLC, the WLR Trust I, and the BKR Trust I ("the

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Indemnitors") executed a General Agreement of Indemnity ("the Agreement") in exchange

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for bonds issued by plaintiff. By signing the Agreement, the Indemnitors promised to

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indemnify plaintiff against loss arising from the bonds.1 The Agreement includes a

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paragraph titled "Collateral Security," where the Indemnitors promised to deposit an amount

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determined by plaintiff to be sufficient to discharge any losses "upon demand" of plaintiff.

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Compl., ex. A ¶ 5. The Indemnitors also agreed that plaintiff "would suffer irreparable

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damage and would not have an adequate remedy at law" if they failed to comply. Id.

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Plaintiff issued two bonds in connection with defendants' construction projects for the

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Birchman Baptist Church and the Comanche County Memorial Hospital. Plaintiff began

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The Agreement defines indemnitors as those signing the Agreement, along with
"their present and future direct and indirect subsidiaries, affiliates, and parent companies,"
as well as "any joint venture, co-venture, consortium, partnership, trust, association, limited
liability company or other legal entity in which one or more of them are involved." Compl.,
ex. A ¶ 1 (doc. 13).
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receiving payment bond claims relating to these projects. On February 1, 2012, plaintiff sent

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the Indemnitors a letter stating that they defaulted under the terms of the Agreement and

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demanding that they deposit $1,303,088 as collateral security. Compl., ex. B.

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Plaintiff filed this action on February 23, 2012. An amended complaint was filed

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March 1, 2012 (doc. 11). The amended complaint asserts four counts: (1) breach of contract;

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(2) specific performance - collateral; (3) quia timet; and (4) claim and delivery. That same

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day, plaintiff moved for a preliminary injunction, which we have already granted in part as

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discussed above (doc. 42). We now address plaintiff's outstanding request for a preliminary

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injunction that (1) requires defendants to deposit $1,303,088 as collateral and (2) prohibits

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defendants from transferring or otherwise secreting assets until collateral is provided.
II

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A federal court sitting in diversity applies federal procedure and state substantive law

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to state law claims. See Hanna v. Plumer, 380 U.S. 460, 471, 85 S. Ct. 1136, 1144 (1965).

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Plaintiff argues, citing Sims Snowboards, Inc. v. Kelly, 863 F.2d 643 (9th Cir. 1988), that

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we must apply Arizona law rather than Rule 65, Fed. R. Civ. P. and its standards. We

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disagree. Sims first determined that there was no direct conflict between Rule 65, Fed. R.

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Civ. P. and the California anti-injunction statute, which "expressly prohibits" injunctions in

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the type of claim at issue. Id. at 646. Noting that the Erie doctrine requires the application

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of state law "if the state law is outcome-determinative," Sims held that a federal court sitting

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in diversity may not grant preliminary injunctive relief "if state law clearly rejects the

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availability of that remedy," because in that scenario the selection of state or federal law is

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"outcome-determinative." Id. at 646-47. We are not presented with the same scenario. Both

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federal law and Arizona law permit a court to issue the type of preliminary injunctive relief

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requested by plaintiff. And at heart, Rule 65, Fed. R. Civ. P. is procedural. See id. at 646

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("Rule 65 merely sets out the procedural requirements for injunctions and restraining

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orders."). Accordingly, we apply it here. Because we apply the federal rule, we apply

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federal law interpreting that rule. See Sullivan v. Vallejo City Unified Sch. Dist., 731 F.

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Supp. 947, 957 (E.D. Cal. 1990); see also Certified Restoration Dry Cleaning Network, LLC
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v. Tenke Corp., 511 F.3d 535, 541 (6th Cir. 2007) (applying federal law "factors to consider

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in granting a preliminary injunction"); Ferrero v. Associated Materials Inc., 923 F.2d 1441,

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1448 (11th Cir. 1991) (applying federal standard for granting a preliminary injunction rather

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than the more lenient state law standard in a diversity action).

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III

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Preliminary injunctive relief is "an extraordinary remedy." Winter v. Natural Res.

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Def. Council, Inc., 555 U.S. 7, 24, 129 S. Ct. 365, 376 (2008). To obtain it, plaintiff must

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show that (1) it is "likely to succeed on the merits," (2) it is "likely to suffer irreparable harm

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in the absence of preliminary relief," (3) "the balance of equities tips in [its] favor," and (4)

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"an injunction is in the public interest." Id. at 20, 129 S. Ct. at 374.

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A preliminary injunction can be either prohibitory or mandatory. A prohibitory

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injunction "prohibits a party from taking action," preserving the status quo until the action

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is decided on the merits. Marlyn Nutraceuticals, Inc. v. Mucos Pharma GmbH & Co., 571

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F.3d 873, 878 (9th Cir. 2009). A mandatory injunction orders a party to act in a way that

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goes beyond maintenance of the status quo and "is particularly disfavored." Id. at 879

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(citation omitted). Mandatory injunctions are generally not granted unless "extreme or very

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serious damage will result and are not issued in doubtful cases or where the injury

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complained of is capable of compensation in damages." Id. (citation omitted).

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Plaintiff seeks an injunction requiring defendants to deposit $1,303,088 as collateral

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security. Although plaintiff argues that pursuant to Arizona law it is entitled to injunctive

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relief of collateralization under the doctrine of quia timet, it has not pointed to any Ninth

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Circuit cases that grant preliminary injunctive relief of collateralization pursuant to quia

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timet. See Hudson Ins. Co. v. Simmons Constr., LLC, CV-12-407-PHX-GMS, 2012 WL

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869383, at *3 (D. Ariz. Mar. 14, 2012) (finding no cases in this Circuit issuing a temporary

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restraining order ("TRO") based on the common-law doctrine of quia timet, noting that

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courts entering TROs requiring collateralization have relied on Rule 65, Fed. R. Civ. P.).

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Accordingly, to obtain collateralization as preliminary injunctive relief, plaintiff must

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show that it will likely suffer irreparable harm. Id. Defendants argue that plaintiff has not
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met its burden. We agree. Plaintiff points to the Agreement's language, arguing that

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defendants agreed that plaintiff "would suffer irreparable damage and would not have an

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adequate remedy at law." Compl., ex. A ¶ 5. But this contractual language, without more,

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does not show a likelihood of irreparable harm. See Hudson, 2012 WL 869383 at *4 (fact

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that surety agreement used term "irreparable harm" did not in itself "support the

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extraordinary remedy" of a temporary restraining order). Plaintiff has not shown that it is

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likely to incur any damages other than the economic cost of paying the bond claims prior to

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receiving collateral. Economic injury alone, however, "does not support a finding of

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irreparable harm, because such injury can be remedied by a damage award." Rent-A-Center,

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Inc. v. Canyon Television & Appliance Rental, Inc., 944 F.2d 597, 603 (9th Cir. 1991).

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Moreover, ordering defendants to pay collateral amounts to a mandatory injunction. Plaintiff

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has not shown that extreme or very serious damage will result if the collateral is not

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provided. It has not, for example, established that it does not possess sufficient funds to pay

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the bond claims. And it has not shown that the injury sustained by defendants' failure to

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provide collateral is incapable of being compensated with money damages. See Marlyn

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Nutraceuticals, 571 F.3d at 879. Because plaintiff has not shown it is likely to suffer

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irreparable harm or that a mandatory injunction is warranted, it is not entitled to preliminary

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injunctive relief requiring defendants to provide collateral security.

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Plaintiff also requests an injunction prohibiting defendants from transferring or

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secreting their assets until collateral is provided. Unlike plaintiff's request for collateral, this

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is a prohibitory injunction. Dissipation of assets can constitute irreparable harm. See In re

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Focus Media Inc., 387 F.3d 1077, 1086-87 (9th Cir. 2004). However, plaintiff has not shown

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that irreparable harm is likely. Although plaintiff alleges in its complaint that defendants are

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diverting assets into the WLR Trust II and WLR Trust III, the only evidence submitted by

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plaintiff is a letter from the Trustee confirming that these trust assets cannot be assigned to

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secure obligations for William Rowland because he has no interest in these two trusts. Mot.

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for Prelim. Inj., ex. 7 (doc. 15). This letter does not prove that defendants will likely secret

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or divert assets. It merely shows that assets, if they were to be transferred to these two trusts,
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could not be reached by plaintiff to secure William Rowland's obligations. Because plaintiff

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has not shown that it is likely to incur irreparable harm, it is not entitled to preliminary

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injunctive relief prohibiting defendants from diverting asserts.

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IV

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Despite our denial of the remainder of this motion, we note that plaintiff's likelihood

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of success on the underlying merits is high. In signing the Agreement, the Indemnitors

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agreed to indemnify plaintiff for loss relating to the bonds and agreed to provide collateral

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upon demand. Plaintiff is now receiving bond claims and has demanded collateral, which

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defendants have not provided. Although we deny plaintiff's request for preliminary

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injunctive relief based on the current record, plaintiff's motion was based on its mistaken

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belief that state rather than federal law would apply. It may be the case that plaintiff can

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prove that it is entitled to preliminary injunctive relief under the applicable federal standards.

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Accordingly, IT IS ORDERED DENYING the remainder of plaintiff's motion for

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preliminary injunction (doc. 14). Plaintiff's requests that defendants be required to deposit

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$1,303,088 as collateral and that defendants be prohibited from secreting or diverting assets

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are DENIED. The injunction ordering defendants to use contract proceeds from bonded

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projects to pay bonded debts to claimants who have properly perfected a valid bond claim

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is AFFIRMED (doc. 42).

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This denial is without prejudice to the right of plaintiff to file a motion showing it is
entitled to preliminary injunctive relief under federal standards.
DATED this 15th day of May, 2012.

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