Hudson Insurance Company v. Simmons Construction LLC et al

Filing 37

ORDER that Defendant's 33 Rule 59(d) Motion is denied. Plaintiffs 26 Motion for Partial Summary Judgment is granted. Defendants are ordered to provide Plaintiff collateral in the amount of $3,900,000 to cover Plaintiff's financial exposure under the bonds. Plaintiff shall not disperse of the demanded funds until further order of the Court. Signed by Judge David G Campbell on 11/2/2012.(LFIG)

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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
corporation,

No. CV-12-0407-PHX-DGC
ORDER

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Plaintiff,

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v.

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Simmons Construction, LLC, an Arizona
limited liability company; SKS Investments
& Developments, LLC, an Arizona limited
liability company; Todd G. Simmons
Revocable Trust; Todd G. Simmons and
Jane Doe Simmons, Arizona individuals
individually and as husband and wife,

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Defendants.

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Plaintiff Hudson Insurance Company has filed a motion for partial summary

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judgment seeking specific performance of the collateral security provisions of a

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November 9, 2010 General Indemnity Agreement with Defendants Simmons

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Construction and related entities. Doc. 26. Defendants have filed a Rule 56(d) motion

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requesting additional time for discovery before the court rules on the motion for partial

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summary judgment. Doc. 33. Plaintiff has filed a response to the Rule 56(d) motion.

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Doc. 34. Neither party has requested oral argument. For the reasons that follow, the

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Court will grant partial summary judgment and deny the Rule 56(d) motion.

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I.

Factual Background.

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Most of the relevant facts are not controverted. Plaintiff is a surety that entered

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into a General Indemnity Agreement (“GIA”) on November 9, 2010. Doc. 27 at 2.

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Defendants are the indemnitors. The GIA was issued as partial consideration for, and as

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a precondition to, Plaintiff’s issuance of surety bonds on behalf of Defendants. Id.

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Plaintiff issued five bonds relating to five different construction projects. Id. at 2-3. The

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“Indemnity to Surety” section of the GIA provides that the indemnitors shall pay, upon

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demand:

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[a]ny amount sufficient to discharge any claim made against
Surety on any bond, whether Surety will have made any
payment or established any reserve therefore. Such payment
to be in the amount deemed necessary by the Surety to protect
it from any loss, cost or expense. This sum may be used by
Surety to pay such claim or be held by Surety as collateral
security against loss, cost or expense on any Bond. The
[Defendants] acknowledge[] that their failure to pay,
immediately on demand by the Surety, constitutes a Default
under this agreement and entitles the Surety to injunctive
relief for specific enforcement of the foregoing provision.

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Doc. 27-2 at 14. A later portion of the GIA provides that Defendants will “procure the

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discharge of Surety from any Bond and all liability by reason thereof, if such discharge is

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unattainable, the [Defendant] will, if requested by Surety, either deposit collateral with

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Surety, acceptable to Surety, sufficient to cover all exposure under such Bonds or bonds,

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or make provisions acceptable to Surety[.]” Id. at 16.

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In 2011, Plaintiff began to receive claims on the bonds issued on Defendants’

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behalf and began to accrue costs. Doc. 27 at 4. As of that time, Defendants had been

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declared to be in default on four of the five bonds and each of those four defaulted

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projects has made claims against Plaintiff. Id. Plaintiff has also been named in four

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lawsuits in connection with these bonds. Id. at 5. As a result of the claims, lawsuits, and

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associated legal expenses, Plaintiff has anticipated a loss of $3,900,000, and has set aside

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a loss reserve for that amount. Id. at 6. Plaintiff has also issued a collateral demand to

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Defendants pursuant to the terms of the GIA. Doc. 27-1 at 36. Defendants have not

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responded to the collateral demand.

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On March 13, 2012, the Court issued an injunction prohibiting Defendants from

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“selling, transferring, wasting, encumbering, or otherwise disposing of their assets.”

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Doc. 14. The Court denied Plaintiff’s request to issue a TRO to compel collateralization,
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but stated that Plaintiffs “may very well be entitled to specific performance under the

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Agreement at some point.” Id. at 7.

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II.

Legal Standard.

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A party seeking summary judgment bears the initial responsibility of informing

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the district court of the basis for its motion, and identifying those portions of the record

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which it believes demonstrate the absence of a genuine issue of material fact. Celotex

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Corp. v. Catrett, 477 U.S. 317, 323 (1986). Summary judgment is appropriate if the

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evidence, viewed in the light most favorable to the nonmoving party, shows “that there is

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no genuine dispute as to any material fact and the movant is entitled to judgment as a

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matter of law.” Fed. R. Civ. P. 56(a). Summary judgment is also appropriate against a

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party who “fails to make a showing sufficient to establish the existence of an element

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essential to that party’s case, and on which that party will bear the burden of proof at

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trial.” Celotex, 477 U.S. at 322. Only disputes over facts that might affect the outcome

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of the suit will preclude the entry of summary judgment, and the disputed evidence must

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be “such that a reasonable jury could return a verdict for the nonmoving party.”

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Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

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III.

Analysis.

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Defendant has filed a Rule 56(d) motion to delay summary judgment. Doc. 33.

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Such a motion should be granted if the movant shows “(1) it has set forth in affidavit

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form the specific facts it hopes to elicit from further discovery; (2) the facts sought exist;

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and (3) the sought after facts are essential to oppose summary judgment.” Family Home

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and Finance Center, Inc. v. Federal Home Loan Mortg. Corp., 525 F.3d 822, 827 (9th

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Cir. 2008).

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Plaintiff argues that the GIA requires Defendants to provide collateral. In their

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Rule 56(d) motion, Defendants do not contest that interpretation of the GIA or its

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enforceability. Instead, Defendants argue that more information about the construction

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projects, to be obtained during discovery, will demonstrate that Defendants are not

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ultimately liable for the defaults and resulting damages. Doc. 33. Defendants claim that
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this information will be relevant to whether Plaintiff is entitled to the posting of collateral

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and, if so, in what amount. Id. at 7.

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Additional discovery regarding the merits of the claims against both Plaintiff and

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Defendants would provide more certainty about ultimate liability, but the terms in the

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GIA guarantee the Surety more than simple resolution of indemnity claims. Plaintiffs

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cite language in the GIA stating that Defendants specifically agreed to pay “an amount

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sufficient to discharge any claim made against Surety on any Bond, whether Surety will

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have made any payment or established any reserve therefore. Such payment to be in the

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amount deemed necessary by the Surety to protect it from any loss, cost or expense.”

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Doc. 27-2 at 14 (emphasis added). The same section grants Plaintiff the power to hold

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demanded funds as collateral. Id.

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In its motion, Plaintiff requests that Defendants “immediately provide collateral in

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the amount of $3,900,000 to cover Hudson’s financial exposure under the Bonds.”

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Doc. 26 at 2. Because Plaintiff requests collateralization rather than ultimate payment, its

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request is perhaps better characterized as invoking the sixth clause under the “General

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Provisions” heading in the GIA which contemplates the posting of collateral as security.

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Doc. 27-2 at 16. While the merits of the claims are relevant to the Surety’s determination

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of the amount necessary to protect it against loss, both the indemnity and collateral

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sections of the GIA leave that determination to the Surety. Id. Neither section would

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permit Defendants to wait until the resolution of all claims before posting collateral.

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Therefore, the only remaining question is the enforceability of the GIA under Ninth

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Circuit law.

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In the Ninth Circuit, “sureties are ordinarily entitled to specific performance of

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collateral security clauses” because “‘[i]f a creditor is to have the security position for

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which he bargained, the promise to maintain the security must be specifically enforced.”

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Safeco Ins. Co. of America v. Schwab, 739 F.2d 431 (9th Cir. 1984) (quoting Marine

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Midland Trust Co. v. Alleghany Corp., 28 F. Supp. 680, 683-84 (S.D.N.Y. 1939)); see

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also Milwaukee Construction Co. v. Glens Falls Insurance Co., 367 F.2d 964 (9th Cir.
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1966). With respect to posting collateral before the issue of ultimate indemnity has been

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fully litigated, the Ninth Circuit has held that

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equity generally implies a right to indemnification in favor of
a surety only when the surety pays off a debt for which his
principal is liable. However, resort to implied indemnity
principles is improper when an express indemnification
contract exists. “There can be no question but that a surety is
entitled to stand upon the letter of his contract, and his
undertaking is to be construed strictly in his favor and is not
to be extended by implication or inference beyond the bare
scope of its terms.”

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Commercial Ins. Co. of Newark, N.J. v. Pacficic-Peru Constr. Corp., 558 F.2d 948, 953

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(9th Cir. 1977) (quoting Hackfeld and Co., Ltd. v. Medcalf, 20 Haw. 47, 54 (1910))

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(citations omitted).

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Plaintiffs do not contest that a default has occurred. The GIA provides that “[a]n

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itemized statement of loss and expense incurred by Surety, sworn by an officer of the

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Surety, shall be prima facie evidence of the fact and extent of the liability of [Defendants]

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to Surety in any claim or suit by Surety against [Defendants].” Id. at 14. Plaintiff has

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provided such a statement. Doc. 27-1 at 36. Defendants have not responded. Under

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these circumstances the benefit of the collateral security to which Plaintiff is entitled can

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only be guaranteed through specific performance.

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III.

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Conclusion.
The Court finds that the GIA is enforceable under Ninth Circuit law and that

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Defendants are in breach of that agreement.

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$3,900,000 and have deemed that same amount necessary to protect it from any loss,

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cost, or expense. Plaintiff need not wait until ultimate resolution of the indemnity claims

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to demand collateral, so long as that collateral is not dispersed until indemnifiable claims

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are determined and the remainder, if any, is returned to Defendants. Accordingly, the

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Court grants Plaintiffs motion for partial summary judgment.

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Plaintiff has established a reserve of

IT IS ORDERED:

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Defendant’s Rule 59(d) motion (Doc. 33) is denied.

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2.

Plaintiffs motion for partial summary judgment (Doc. 26) is
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granted.

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Defendants are ordered to provide Plaintiff collateral in the amount

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of $3,900,000 to cover Plaintiff’s financial exposure under the

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bonds.

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further order of the Court.

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Dated this 2nd day of November, 2012.

Plaintiff shall not disperse of the demanded funds until

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