Hudson Insurance Company v. Simmons Construction LLC et al
Filing
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ORDER granting in part and denying in part 4 Plaintiff's Motion for TRO and Motion for Preliminary Injunction. A Temporary Restraining Order is hereby issued, see PDF document for details. Signed by Judge G Murray Snow on 3/14/12.(LSP)
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WO
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IN THE UNITED STATES DISTRICT COURT
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FOR THE DISTRICT OF ARIZONA
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Hudson Insurance Company, a Delaware )
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corporation
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Plaintiff,
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vs.
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Simmons Construction, LLC, an Arizona )
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limited liability company, et al.,
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Defendants.
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No. CV-12-407-PHX-GMS
TEMPORARY RESTRAINING ORDER
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Pending before the Court is an Application for a Temporary Restraining Order
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(“TRO”) by Plaintiff Hudson Insurance Company (“Hudson”). (Doc. 4). For the reasons
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stated below, the application is granted in part and a TRO is issued.
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BACKGROUND
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On November 9, 2010, Hudson entered into an Indemnity Agreement (“the
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Agreement”) with Defendants Simmons Construction, LLC (“Simmons Construction”), SKS
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Investments (“SKS”), Todd G. Simmons Revocable Trust (“the Trust”), and Todd Simmons.
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(Doc. 1-1, Ex. A). Hudson and the Defendants entered into the Agreement pursuant to
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Hudson’s issuance of surety bonds on behalf of Simmons Construction in relation to a
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number of construction projects in Arizona. (Doc. 6 ¶ 12). Defendants agreed that if
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Simmons Construction defaulted on its construction projects and the project owners made
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claims on Hudson under the bonds, Defendants would indemnify Plaintiff for the cost of such
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claims. (Doc. 1-1, Ex. A). Defendants agreed that they would pay Plaintiff on demand an
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amount sufficient to discharge any claims made against the bonds, and that failure to do so
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constituted Default under the Agreement and entitled Plaintiff to injunctive relief for specific
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performance. (Id.). Furthermore, the Agreement grants Plaintiff a security interest in
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Defendants’ assets, to be exercised in the event of a breach, and provides Plaintiff with “free
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access at reasonable times to the books, records, and accounts” of each of the Defendants.
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(Id.).
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Plaintiff has received claims against the bonds in two of the four projects, and has
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substituted a contractor on one of the contracts to ensure that it is completed. (Doc. 6
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¶¶ 13–18). Simmons is in default on two other contracts, although claims in relation to these
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contracts have not yet been filed. (Doc. 6 ¶ 27–33). In addition, numerous claims have been
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filed by subcontractors and suppliers, totaling over $2,000,000. (Doc. 6 ¶¶ 35–36).
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Combining the claims that have been filed and those it anticipates will be filed based on
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default by Simmons Construction, Plaintiff expects its total obligations under the bonds to
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be $5,625,031.80.
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Plaintiff seeks a TRO that will 1) enjoin Defendants from selling or otherwise
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disposing of assets, 2) require Defendants to post $5,625,031.80 in collateral or security, 3)
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grant a lien in the amount of $5,626,031.80 in favor of Hudson upon all assets of Defendants,
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4) grant Plaintiff immediate access to Defendants’ books and records, and 5) require
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Defendants to show cause why the TRO should not remain in effect as a Preliminary
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Injunction. (Doc. 4).
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A hearing was held on March 13, 2012.
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DISCUSSION
I.
Legal Standard - TRO
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A plaintiff must establish four elements in order to be granted a preliminary
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injunction, including “that he is likely to succeed on the merits, that he is likely to suffer
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irreparable harm in the absence of preliminary relief, that the balance of equities tips in his
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favor, and that an injunction is in the public interest.” Winter v. Nat’t Res. Def. Council, 555
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U.S. 7, 20 (2008), see FED. R. CIV. P. 65. The Ninth Circuit considers all of the elements
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except for irreparable injury using a sliding scale approach, where “the elements of the
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preliminary injunction test are balanced, so that a stronger showing of one element may
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offset a weaker showing of another.” Alliance for the Wild Rockies v. Cottrell, 632 F.3d
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1127, 1131 (9th Cir. 2011). The element of irreparable injury is not subject to balance; the
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moving party must “demonstrate that irreparable injury is likely in the absence of an
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injunction.” Winter, 555 U.S. at 23 (emphasis in original).
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II.
Analysis
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A.
Hearing and Agreement
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At the hearing on March 13, 2012, the parties agreed on a number of issues.
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Defendant Simmons Construction represented that it would provide Hudson reasonable
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access to its books and records. Plaintiff conceded that access to records was no longer an
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issue. Therefore, no TRO will issue regarding access to books and records. The Court notes
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that the Agreement guarantees Plaintiff access and that Defendants represented that they
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were providing and would continue to provide such access to Plaintiff.
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Defendants and Plaintiff also agreed that the terms of a TRO enjoining Defendants
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from dissipating assets should nevertheless allow Defendants, including Simmons
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Construction, SKS, the Trust, and Mr. Simmons, to make expenditures in the ordinary course
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of business. In addition, Plaintiff agreed that a TRO should allow Defendants to make
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expenditures on behalf of legal professionals and others in order to pursue their claims in
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litigation to which they are already parties. Parties disagree as to whether a TRO should issue
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requiring the Defendants to post collateral and granting them a lien upon Defendants’
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property. The claims will be discussed in turn.
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B.
Disposing of Assets
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Plaintiff alleges that Defendants are likely to dissipate their assets, which would then
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become unavailable even if a subsequent money judgment in Plaintiff’s favor were to issue.
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Although pure economic loss cannot support an application for a Temporary Restraining
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Order, the possibility that a defendant will dissipate assets, leaving them unavailable, does
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constitute irreparable harm. See In re Focus Media Inc. 387 F.3d 1077 (9th Cir. 2004)
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(holding that the prospect of dissipating assets “raises the specter of irreparable harm to the
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bankruptcy estate if these funds are not frozen”). Defendant is in default on four of the five
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construction projects at issue. Defendants did not respond until appearing at the hearing,
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where they conceded that a TRO could issue freezing their assets, so long as it allowed them
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to make expenditures in the ordinary course of business and continue to pursue legal claims.
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The court finds that the likelihood that assets will be dissipated is sufficiently likely to
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support issuance of a TRO.
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To obtain a TRO, a plaintiff must also show a likelihood of success on the merits, that
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the balance of equities tips in its favor, and that a TRO is in the public interest. See
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Winter,555 U.S. at 20. The Agreement provides that Defendants will indemnify Plaintiff for
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claims on the bonds, and claims on the bonds have been made. (Doc. 1-1 at 2). Plaintiff’s
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likelihood of success on the merits is high. By allowing Defendants to make expenditures in
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the ordinary course of business and pursue ongoing litigation, the hardship they would
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otherwise suffer is mitigated, and the balance of hardship therefore favors issuing a TRO.
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Likewise, enforcing contractual obligations is in the public interest.
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C.
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When a surety anticipates paying claims that have been made against its bond, but has
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not yet made payments, it may enforce equitable provisions of a surety contract. See
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Milwaukie Const. Co. v. Glens Falls Ins. Co., 367 F.2d 964, 966 (9th Cir. 1966) (“[W]here
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appellee knew it was going to have liability claims filed against it but did not know the
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amount of those claims, the legal remedy of money damages would not be adequate.”); see
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also Safeco Ins. Co. of America v. Schwab, 739 F.2d 431, 433 (9th Cir. 1984) (“Sureties are
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ordinarily entitled to specific performance of collateral security clauses.”). Since the surety
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in such situations cannot anticipate the extent of its obligations in advance, and is entitled to
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be indemnified for all of those obligations, it may enforce the specific performance
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provisions in the contract. As the Ninth Circuit noted in Milwaukie Construction, “It is not
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essential that the claim of the surety for relief should depend upon the fact that he will incur
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irreparable injury.” 367 F.2d at 966.
Collateral and Lien
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Sureties generally seek collateralization though the equitable remedy of quia timet,
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and here Plaintiff has invoked quia timet in its application for a TRO. The doctrine of quia
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timet “allows a person to seek equitable relief from future probable harm to a specific right
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or interest.” Blacks Law Dictionary 1367 (9th ed. 2009). District Courts in the Ninth Circuit
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hearing claims by sureties have granted injunctive relief under the doctrine after a finding on
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the merits or a default judgment. See, e.g., Suretec Ins. Co. v. Orchard Hills Estates, LLC,
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CV-09-0110 (LKK-EFB), 2010 WL 4366205 (E. D. Cal. Oct. 27 2010) (granting default
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judgment and a quia timet injunction); American Contractors Indem. Co. v. Bigelow, CV-09-
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8108 (HRH), 2011 WL 5546052 (D. Ariz. Apr. 11, 2011) (granting summary judgment and
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a quia timet injunction). Plaintiffs have provided no case, and the Court has not found one,
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in which the extraordinary remedy of a Temporary Restraining Order has been issued based
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on the doctrine of quia timet.1
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Plaintiff cites a number of cases from state courts or federal courts outside the Ninth
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Circuit which allegedly endorse the proposition that a quia timet injunction is available to a
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surety because “traditional remedies are not sufficient.” (Doc. 5 at 4). In none of these cases
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did the court issue a TRO. See, e.g., Escrow Agents Fidelity Corp. v. Superior Court, 4 Cal
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App. 4th 491, 5 Cal Rptr. 2d 698 (Cal. App. 2 Dist. 1992) (overruling order of state trial
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court sustaining a demurrer); Western Ca. & Sur. Co. v. Biggs, 217 F. 2d 163 (denying
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appeal to set aside equity judgment that had been filed ten years after the judgment had been
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entered); Doster v. Continental Cas. Co. 268 Ala. 123, 106 So. 2d 83 (1958) (upholding trial
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court’s overruling of demurrer). Moreover, all of them predate Winter, in which the Supreme
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Court emphasized that a TRO will not issue unless a party can “demonstrate that irreparable
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injury is likely in the absence of an injunction.” Winter, 555 U.S. at 23 (emphasis in original).
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Whether Defendants will be required to collateralize Plaintiff through a TRO depends on
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whether it is likely that Plaintiff will otherwise suffer irreparable injury.
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As discussed below, District Courts have issued TROs granting sureties
collateralization. These courts have relied upon the standards for issuing a TRO as set forth
in the Federal Rules of Civil Procedure, not on the common-law doctrine of quia timet.
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Some district courts have indeed found that loss of collateralization between the time
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a surety files a claim and the time a judgment is reached on the merits constitutes irreparable
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harm adequate to support issuance of a preliminary injunction or TRO. Usually, such courts
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find that because the indemnitor could otherwise dissipate assets, a preliminary injunction
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was necessary to protect Plaintiff’s interest in being indemnified under the surety bond. For
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example, the Western District of North Carolina has held that a plaintiff should be
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collateralized through a TRO because, among other reasons, “Plaintiff has raised sufficient
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doubt as to whether Defendants would be able to satisfy such judgment.” International
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Fidelity Ins. Co. v. Waterfront Grp. NC, LLC, CV-11-00116 (GCM), 2011 WL 4715155
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(W.D.N.C. Oct. 6, 2011). The Eastern District of North Carolina, in granting such a
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preliminary injunction, wrote that “the court notes that the preliminary injunctive relief
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requested in this case is not an order preventing defendants’ transfer or disposition of any
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specific assets.” First National Ins. Co. of America v. Sappah Brothers, Inc., 771 F. Supp.
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2d 569, 575 n.5 (2011). Others have noted that sureties bargained-for status as secured
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creditor would be lost if a indemnitor were not compelled to collateralize the surety through
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a preliminary injunction. See The Hanover Ins. Co. v. Holley Construction Co. & Assocs.,
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Inc., CV-11-41 (CDL), 2012 WL 398135, at *6 (M.D. Ga. Feb. 7, 2012) (“If the surety is
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deprived of the bargained-for collateral security, it will face the risk of being a general
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unsecured creditor of Defendants and of not being able to collect.”) (internal quotation
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omitted). Others hold that the surety’s harm is irreparable because the surety contract says
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it is irreparable. See Great American Ins. Co. v. SRS, Inc., CV-11-970 (M.D. Tenn. Dec. 23,
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2011) (“The Indemnity Agreement specifically states that ‘the [Indemnitors] acknowledge
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that the failure of the [Indemnitors] to deposit with [Great American], immediately upon
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demand, the sum demanded by [Great American] as payment shall cause irreparable
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harm’”) (emphasis in original).
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Neither the Ninth Circuit itself nor the District Courts within the Ninth Circuit have
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been swayed by these arguments. See Hanover Ins. Co. v. TLC Investing, LLC, 11-CV-711
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(JCM) 2011 WL 3841299, at *1 (D. Nev. Aug. 26, 2011) (denying motion for
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reconsideration of denial of preliminary injunction when insurer provided three cases
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classifying the harm a surety suffers as “irreparable” because “[n]one of the cases . . . are
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Ninth Circuit cases that would be binding upon this court”). A TRO prohibiting Defendants
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from dissipating their assets adequately protects Plaintiff from the potential that the assets
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will not be available in the future. Although collateralization may improve Plaintiff’s position
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relative to other creditors should Defendants eventually file for bankruptcy protection,
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Plaintiff has not made any effort to show that such an outcome is “likely,” or that it is entitled
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to such preference. Finally, the fact that the Agreement uses the term “irreparable harm” does
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not support the extraordinary remedy of a TRO. Although Plaintiff does not at this time know
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the extent of the obligations for which it must be indemnified, there is no question that those
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obligations are purely economic. (Doc.4 at 4). “Economic damages are not traditionally
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considered irreparable because the injury can later be remedied by a monetary award.” Jones
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v. Bank of America, N.A., 09-CV-2129 (JAT) 2010 WL 2572997, at *12 (D. Ariz. June 22,
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2010). Plaintiff may very well be entitled to specific performance under the Agreement at
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some point. The extraordinary remedy of a TRO, however, is not available for
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collateralization.
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D.
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At the hearing, Defendants were informed that they would be required to appear and
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show cause, if any, why the TRO should not remain in effect as a Preliminary Injunction
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pending disposition of this matter. They will be required to do so. Further, they conceded that
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a bond is not necessary.
Requirement to Show Cause and Bond
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IT IS THEREFORE ORDERED that Plaintiff’s Application for Temporary
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Restraining Order and Preliminary Injunction (Doc. 4) is granted in part and denied in
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part. A Temporary Restraining Order is hereby issued ordering that:
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1.
Defendants are enjoined from selling, transferring, wasting, encumbering or
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otherwise disposing of their assets and property except in the ordinary course of business.
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Defendants are permitted to make expenditures on behalf of legal professionals and others
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in order to pursue their claims in litigation to which they are already parties.
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2.
Defendants will be required to appear and show cause, if any, why the TRO
should not remain in effect as a Preliminary Injunction pending disposition of this matter.
DATED this 14th day of March, 2012.
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