Hudson Insurance Company v. Simmons Construction LLC et al

Filing 14

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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1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 10 11 12 13 14 Hudson Insurance Company, a Delaware ) ) corporation ) ) Plaintiff, ) ) vs. ) Simmons Construction, LLC, an Arizona ) ) limited liability company, et al., ) ) Defendants. ) No. CV-12-407-PHX-GMS TEMPORARY RESTRAINING ORDER 15 16 Pending before the Court is an Application for a Temporary Restraining Order 17 (“TRO”) by Plaintiff Hudson Insurance Company (“Hudson”). (Doc. 4). For the reasons 18 stated below, the application is granted in part and a TRO is issued. 19 BACKGROUND 20 On November 9, 2010, Hudson entered into an Indemnity Agreement (“the 21 Agreement”) with Defendants Simmons Construction, LLC (“Simmons Construction”), SKS 22 Investments (“SKS”), Todd G. Simmons Revocable Trust (“the Trust”), and Todd Simmons. 23 (Doc. 1-1, Ex. A). Hudson and the Defendants entered into the Agreement pursuant to 24 Hudson’s issuance of surety bonds on behalf of Simmons Construction in relation to a 25 number of construction projects in Arizona. (Doc. 6 ¶ 12). Defendants agreed that if 26 Simmons Construction defaulted on its construction projects and the project owners made 27 claims on Hudson under the bonds, Defendants would indemnify Plaintiff for the cost of such 28 claims. (Doc. 1-1, Ex. A). Defendants agreed that they would pay Plaintiff on demand an 1 amount sufficient to discharge any claims made against the bonds, and that failure to do so 2 constituted Default under the Agreement and entitled Plaintiff to injunctive relief for specific 3 performance. (Id.). Furthermore, the Agreement grants Plaintiff a security interest in 4 Defendants’ assets, to be exercised in the event of a breach, and provides Plaintiff with “free 5 access at reasonable times to the books, records, and accounts” of each of the Defendants. 6 (Id.). 7 Plaintiff has received claims against the bonds in two of the four projects, and has 8 substituted a contractor on one of the contracts to ensure that it is completed. (Doc. 6 9 ¶¶ 13–18). Simmons is in default on two other contracts, although claims in relation to these 10 contracts have not yet been filed. (Doc. 6 ¶ 27–33). In addition, numerous claims have been 11 filed by subcontractors and suppliers, totaling over $2,000,000. (Doc. 6 ¶¶ 35–36). 12 Combining the claims that have been filed and those it anticipates will be filed based on 13 default by Simmons Construction, Plaintiff expects its total obligations under the bonds to 14 be $5,625,031.80. 15 Plaintiff seeks a TRO that will 1) enjoin Defendants from selling or otherwise 16 disposing of assets, 2) require Defendants to post $5,625,031.80 in collateral or security, 3) 17 grant a lien in the amount of $5,626,031.80 in favor of Hudson upon all assets of Defendants, 18 4) grant Plaintiff immediate access to Defendants’ books and records, and 5) require 19 Defendants to show cause why the TRO should not remain in effect as a Preliminary 20 Injunction. (Doc. 4). 21 A hearing was held on March 13, 2012. 22 23 DISCUSSION I. Legal Standard - TRO 24 A plaintiff must establish four elements in order to be granted a preliminary 25 injunction, including “that he is likely to succeed on the merits, that he is likely to suffer 26 irreparable harm in the absence of preliminary relief, that the balance of equities tips in his 27 favor, and that an injunction is in the public interest.” Winter v. Nat’t Res. Def. Council, 555 28 U.S. 7, 20 (2008), see FED. R. CIV. P. 65. The Ninth Circuit considers all of the elements -2- 1 except for irreparable injury using a sliding scale approach, where “the elements of the 2 preliminary injunction test are balanced, so that a stronger showing of one element may 3 offset a weaker showing of another.” Alliance for the Wild Rockies v. Cottrell, 632 F.3d 4 1127, 1131 (9th Cir. 2011). The element of irreparable injury is not subject to balance; the 5 moving party must “demonstrate that irreparable injury is likely in the absence of an 6 injunction.” Winter, 555 U.S. at 23 (emphasis in original). 7 II. Analysis 8 A. Hearing and Agreement 9 At the hearing on March 13, 2012, the parties agreed on a number of issues. 10 Defendant Simmons Construction represented that it would provide Hudson reasonable 11 access to its books and records. Plaintiff conceded that access to records was no longer an 12 issue. Therefore, no TRO will issue regarding access to books and records. The Court notes 13 that the Agreement guarantees Plaintiff access and that Defendants represented that they 14 were providing and would continue to provide such access to Plaintiff. 15 Defendants and Plaintiff also agreed that the terms of a TRO enjoining Defendants 16 from dissipating assets should nevertheless allow Defendants, including Simmons 17 Construction, SKS, the Trust, and Mr. Simmons, to make expenditures in the ordinary course 18 of business. In addition, Plaintiff agreed that a TRO should allow Defendants to make 19 expenditures on behalf of legal professionals and others in order to pursue their claims in 20 litigation to which they are already parties. Parties disagree as to whether a TRO should issue 21 requiring the Defendants to post collateral and granting them a lien upon Defendants’ 22 property. The claims will be discussed in turn. 23 B. Disposing of Assets 24 Plaintiff alleges that Defendants are likely to dissipate their assets, which would then 25 become unavailable even if a subsequent money judgment in Plaintiff’s favor were to issue. 26 Although pure economic loss cannot support an application for a Temporary Restraining 27 Order, the possibility that a defendant will dissipate assets, leaving them unavailable, does 28 constitute irreparable harm. See In re Focus Media Inc. 387 F.3d 1077 (9th Cir. 2004) -3- 1 (holding that the prospect of dissipating assets “raises the specter of irreparable harm to the 2 bankruptcy estate if these funds are not frozen”). Defendant is in default on four of the five 3 construction projects at issue. Defendants did not respond until appearing at the hearing, 4 where they conceded that a TRO could issue freezing their assets, so long as it allowed them 5 to make expenditures in the ordinary course of business and continue to pursue legal claims. 6 The court finds that the likelihood that assets will be dissipated is sufficiently likely to 7 support issuance of a TRO. 8 To obtain a TRO, a plaintiff must also show a likelihood of success on the merits, that 9 the balance of equities tips in its favor, and that a TRO is in the public interest. See 10 Winter,555 U.S. at 20. The Agreement provides that Defendants will indemnify Plaintiff for 11 claims on the bonds, and claims on the bonds have been made. (Doc. 1-1 at 2). Plaintiff’s 12 likelihood of success on the merits is high. By allowing Defendants to make expenditures in 13 the ordinary course of business and pursue ongoing litigation, the hardship they would 14 otherwise suffer is mitigated, and the balance of hardship therefore favors issuing a TRO. 15 Likewise, enforcing contractual obligations is in the public interest. 16 C. 17 When a surety anticipates paying claims that have been made against its bond, but has 18 not yet made payments, it may enforce equitable provisions of a surety contract. See 19 Milwaukie Const. Co. v. Glens Falls Ins. Co., 367 F.2d 964, 966 (9th Cir. 1966) (“[W]here 20 appellee knew it was going to have liability claims filed against it but did not know the 21 amount of those claims, the legal remedy of money damages would not be adequate.”); see 22 also Safeco Ins. Co. of America v. Schwab, 739 F.2d 431, 433 (9th Cir. 1984) (“Sureties are 23 ordinarily entitled to specific performance of collateral security clauses.”). Since the surety 24 in such situations cannot anticipate the extent of its obligations in advance, and is entitled to 25 be indemnified for all of those obligations, it may enforce the specific performance 26 provisions in the contract. As the Ninth Circuit noted in Milwaukie Construction, “It is not 27 essential that the claim of the surety for relief should depend upon the fact that he will incur 28 irreparable injury.” 367 F.2d at 966. Collateral and Lien -4- 1 Sureties generally seek collateralization though the equitable remedy of quia timet, 2 and here Plaintiff has invoked quia timet in its application for a TRO. The doctrine of quia 3 timet “allows a person to seek equitable relief from future probable harm to a specific right 4 or interest.” Blacks Law Dictionary 1367 (9th ed. 2009). District Courts in the Ninth Circuit 5 hearing claims by sureties have granted injunctive relief under the doctrine after a finding on 6 the merits or a default judgment. See, e.g., Suretec Ins. Co. v. Orchard Hills Estates, LLC, 7 CV-09-0110 (LKK-EFB), 2010 WL 4366205 (E. D. Cal. Oct. 27 2010) (granting default 8 judgment and a quia timet injunction); American Contractors Indem. Co. v. Bigelow, CV-09- 9 8108 (HRH), 2011 WL 5546052 (D. Ariz. Apr. 11, 2011) (granting summary judgment and 10 a quia timet injunction). Plaintiffs have provided no case, and the Court has not found one, 11 in which the extraordinary remedy of a Temporary Restraining Order has been issued based 12 on the doctrine of quia timet.1 13 Plaintiff cites a number of cases from state courts or federal courts outside the Ninth 14 Circuit which allegedly endorse the proposition that a quia timet injunction is available to a 15 surety because “traditional remedies are not sufficient.” (Doc. 5 at 4). In none of these cases 16 did the court issue a TRO. See, e.g., Escrow Agents Fidelity Corp. v. Superior Court, 4 Cal 17 App. 4th 491, 5 Cal Rptr. 2d 698 (Cal. App. 2 Dist. 1992) (overruling order of state trial 18 court sustaining a demurrer); Western Ca. & Sur. Co. v. Biggs, 217 F. 2d 163 (denying 19 appeal to set aside equity judgment that had been filed ten years after the judgment had been 20 entered); Doster v. Continental Cas. Co. 268 Ala. 123, 106 So. 2d 83 (1958) (upholding trial 21 court’s overruling of demurrer). Moreover, all of them predate Winter, in which the Supreme 22 Court emphasized that a TRO will not issue unless a party can “demonstrate that irreparable 23 injury is likely in the absence of an injunction.” Winter, 555 U.S. at 23 (emphasis in original). 24 Whether Defendants will be required to collateralize Plaintiff through a TRO depends on 25 whether it is likely that Plaintiff will otherwise suffer irreparable injury. 26 1 27 28 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. -5- 1 Some district courts have indeed found that loss of collateralization between the time 2 a surety files a claim and the time a judgment is reached on the merits constitutes irreparable 3 harm adequate to support issuance of a preliminary injunction or TRO. Usually, such courts 4 find that because the indemnitor could otherwise dissipate assets, a preliminary injunction 5 was necessary to protect Plaintiff’s interest in being indemnified under the surety bond. For 6 example, the Western District of North Carolina has held that a plaintiff should be 7 collateralized through a TRO because, among other reasons, “Plaintiff has raised sufficient 8 doubt as to whether Defendants would be able to satisfy such judgment.” International 9 Fidelity Ins. Co. v. Waterfront Grp. NC, LLC, CV-11-00116 (GCM), 2011 WL 4715155 10 (W.D.N.C. Oct. 6, 2011). The Eastern District of North Carolina, in granting such a 11 preliminary injunction, wrote that “the court notes that the preliminary injunctive relief 12 requested in this case is not an order preventing defendants’ transfer or disposition of any 13 specific assets.” First National Ins. Co. of America v. Sappah Brothers, Inc., 771 F. Supp. 14 2d 569, 575 n.5 (2011). Others have noted that sureties bargained-for status as secured 15 creditor would be lost if a indemnitor were not compelled to collateralize the surety through 16 a preliminary injunction. See The Hanover Ins. Co. v. Holley Construction Co. & Assocs., 17 Inc., CV-11-41 (CDL), 2012 WL 398135, at *6 (M.D. Ga. Feb. 7, 2012) (“If the surety is 18 deprived of the bargained-for collateral security, it will face the risk of being a general 19 unsecured creditor of Defendants and of not being able to collect.”) (internal quotation 20 omitted). Others hold that the surety’s harm is irreparable because the surety contract says 21 it is irreparable. See Great American Ins. Co. v. SRS, Inc., CV-11-970 (M.D. Tenn. Dec. 23, 22 2011) (“The Indemnity Agreement specifically states that ‘the [Indemnitors] acknowledge 23 that the failure of the [Indemnitors] to deposit with [Great American], immediately upon 24 demand, the sum demanded by [Great American] as payment shall cause irreparable 25 harm’”) (emphasis in original). 26 Neither the Ninth Circuit itself nor the District Courts within the Ninth Circuit have 27 been swayed by these arguments. See Hanover Ins. Co. v. TLC Investing, LLC, 11-CV-711 28 (JCM) 2011 WL 3841299, at *1 (D. Nev. Aug. 26, 2011) (denying motion for -6- 1 reconsideration of denial of preliminary injunction when insurer provided three cases 2 classifying the harm a surety suffers as “irreparable” because “[n]one of the cases . . . are 3 Ninth Circuit cases that would be binding upon this court”). A TRO prohibiting Defendants 4 from dissipating their assets adequately protects Plaintiff from the potential that the assets 5 will not be available in the future. Although collateralization may improve Plaintiff’s position 6 relative to other creditors should Defendants eventually file for bankruptcy protection, 7 Plaintiff has not made any effort to show that such an outcome is “likely,” or that it is entitled 8 to such preference. Finally, the fact that the Agreement uses the term “irreparable harm” does 9 not support the extraordinary remedy of a TRO. Although Plaintiff does not at this time know 10 the extent of the obligations for which it must be indemnified, there is no question that those 11 obligations are purely economic. (Doc.4 at 4). “Economic damages are not traditionally 12 considered irreparable because the injury can later be remedied by a monetary award.” Jones 13 v. Bank of America, N.A., 09-CV-2129 (JAT) 2010 WL 2572997, at *12 (D. Ariz. June 22, 14 2010). Plaintiff may very well be entitled to specific performance under the Agreement at 15 some point. The extraordinary remedy of a TRO, however, is not available for 16 collateralization. 17 D. 18 At the hearing, Defendants were informed that they would be required to appear and 19 show cause, if any, why the TRO should not remain in effect as a Preliminary Injunction 20 pending disposition of this matter. They will be required to do so. Further, they conceded that 21 a bond is not necessary. Requirement to Show Cause and Bond 22 IT IS THEREFORE ORDERED that Plaintiff’s Application for Temporary 23 Restraining Order and Preliminary Injunction (Doc. 4) is granted in part and denied in 24 part. A Temporary Restraining Order is hereby issued ordering that: 25 1. Defendants are enjoined from selling, transferring, wasting, encumbering or 26 otherwise disposing of their assets and property except in the ordinary course of business. 27 Defendants are permitted to make expenditures on behalf of legal professionals and others 28 in order to pursue their claims in litigation to which they are already parties. -7- 1 2 3 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. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -8-

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