WESTERN SURETY COMPANY v. FUTURENET GROUP, INC. et al
Filing
48
OPINION AND ORDER granting in part and denying in part plaintiff's Motion for a Preliminary Injunction 2 Signed by District Judge George Caram Steeh. (MBea)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
WESTERN SURETY COMPANY,
a South Dakota surety company,
Plaintiff,
CASE NO. 16-CV-11055
HONORABLE GEORGE CARAM STEEH
v.
FUTURENET GROUP, INC., a Michigan
corporation, MOTOR CITY DEVELOPER,
LLC f/k/a FUTURENET DEVELOPER, LLC,
a limited liability company, FUTURENET
SECURITY SOLUTIONS, LLC, a limited
liability company, PARIMAL MEHTA,
individually, DIPIKA MEHTA, individually,
JIGNESH MEHTA, individually, and CAPITAL
FUNDING SOLUTIONS, INC,
Defendants.
/
OPINION AND ORDER GRANTING IN PART AND DENYING IN PART
PLAINTIFF’S MOTION FOR A PRELIMINARY INJUNCTION (DOC. 2)
I. INTRODUCTION
Defendant FutureNet Group, Inc. (“FNG”) operates a construction business, and
it has been engaged as the general contractor on a number of government projects.
Plaintiff Western Surety Co. (“Western”) has provided payment and performance bonds
for some of those projects. FNG and codefendants Motor City Developer, LLC (“Motor
City”), FutureNet Security Solutions, LLC (“FNSS”), Parimal Mehta, Dipika Mehta, and
Jignesh Mehta signed an agreement in which they agreed to, inter alia, indemnify
Western against any claims made under the bonds and post collateral at Western’s
-1-
request. These defendants (i.e., all of the defendants except for Capital Funding
Solutions, Inc. (“Capital”)) will hereinafter be referred to as the “Indemnitors.” Western
has received numerous claims under the bonds and has paid millions of dollars to
various claimants. Western alleges that the Indemnitors have failed to comply with the
terms of the indemnity agreement.
Western seeks a preliminary injunction ordering, inter alia, that the Indemnitors
deposit $8,250,000 in collateral with Western. (Pl.’s Mot., Doc. 2; see also Pl.’s Reply,
Doc. 17; Pl.’s Hr’g Br., Doc. 25; Pl.’s Supplemental Br., Doc. 39; Pl.’s Reply to Defs.’
Supplemental Br., Doc. 41). The Indemnitors oppose the motion. (See Defs.’ Resp.,
Doc. 8; Defs.’ Hr’g Br., Doc. 33; Defs.’ Supplemental Br., Doc. 40; Defs.’ Reply to Pl.’s
Supplemental Br., Doc. 43). The Court previously entered a stipulated order in lieu of a
temporary restraining order. (Doc. 20). That order states that the Court shall have the
authority to enforce the terms of an agreement that was reached between the parties.
(Doc. 20; see also Doc. 35-2 (the agreement)). The Indemnitors contend that the terms
of that stipulated order and the associated agreement between the parties are sufficient
to protect Western’s interests pending an adjudication of the merits.
On May 3, 2016, a hearing was held on the preliminary-injunction motion.
Western called its senior claims counsel, Trey Felty, as a witness, and the Indemnitors
called defendant Parimal Mehta. The parties also submitted a number of exhibits. At
the end of the hearing, the Court stated that it was taking the matter under advisement
and requested supplemental briefing from the parties. The parties have submitted their
supplemental briefs and replies and the Court will now rule on the motion. For the
reasons explained below, the Court will grant Western’s motion in part and deny it in
-2-
part. The Court will enjoin the Indemnitors from transferring or encumbering their
assets except in the ordinary course of business or to satisfy necessary living expenses.
Because the existing agreement between the parties (Doc. 35-2) already prohibits the
Indemnitors from doing so, the Court’s preliminary injunction will incorporate that
agreement by reference. The Court will also require the Indemnitors to provide Western
full and complete access to its financial books and records. The Court will not require
the Indemnitors to post collateral.
II. FACTUAL BACKGROUND
Parimal Mehta founded FNG in 2003 and remains the CEO and owner. (5/3/16
Hr’g Test. of Parimal Mehta [hereinafter Mehta Hr’g Test.]). FNG now has over 200
employees. (Id.). FNG operates a construction business and is the general contractor
on a number of government contracts. (Id.). It serves as a project manager, and it
hires subcontractors to complete the actual construction. (Id.). FNG also has an
information-technology division, which provides services to the federal government and
various state and local governments and commercial entities. (Id.). Motor City and
FNSS are wholly owned subsidiaries of FNG. (Id.). FNSS, in particular, was purchased
from the firearms manufacturer Smith & Wesson in 2012. (Id.). It manufactures and
services “active vehicle barriers” which are used to protect over 500 military installations
and other federal and commercial buildings. (Id.; see also FutureNet Group Marketing
Materials, Ex. 501).1
1
“Ex.” shall refer to the exhibits submitted at the May 3, 2016, motion hearing.
-3-
Since 2005, Western and its parent company CNA Financial Corporation have
provided payment and performance bonds for FNG. (Mehta Hr’g Test.; see also
Performance and Payment Bonds, Ex. 102). In consideration of Western’s bonding
services, the Indemnitors executed an indemnity agreement in 2012. (General
Agreement of Indemnity, Ex. 101). Two relevant provisions of the indemnity agreement
are an indemnity clause and a collateral-security clause:
3. INDEMNITY. Indemnitors agree and covenant that they shall
a. upon demand indemnify and save the Surety [that is, Western]
harmless from and against any Loss which the Surety may pay or incur.
In the event of any payments made by the Surety in the good faith belief of
their necessity, the Indemnitors agree to accept the voucher or other
evidence of such payments as prima facie evidence of the propriety
thereof, and of the Indemnitors’ liability therefore to the Surety; and
b. deposit with the Surety on demand collateral security in an
amount and kind satisfactory to the Surety in its sole discretion whenever
the Surety shall reasonably determine that such collateral is necessary to
protect it from Loss whether or not the Surety has made any payment.
The Surety shall have the right to use the deposit, or any part thereof, in
payment or settlement of any Loss . . . .
(Id. ¶ 3). The Indemnitors also agreed to hold “any money earned on any Bonded
Contract . . . in an actual, equitable, or constructive trust for the completion of the
Bonded Contract and for the payment of . . . [contract] obligations.” (Id. ¶ 11). Further,
a default of the indemnity agreement triggers the “assign[ment], transfer, and set[ting]
over to the Surety [of] all of [the Indemnitors’] rights under the Bonded Contracts.” (Id. ¶
9(b)). A default also triggers a grant to Western of “a security interest in all property,
rights, and assets of the Indemnitors, including, but not limited to, all inventory,
equipment, instruments, investments, contract rights and proceeds, insurance,
accounts, and deposits.” (Id. ¶ 10).
-4-
FNG began experiencing financial problems in 2014. (Mehta Hr’g Test.). The
winter of 2013-14 was particularly harsh, resulting in numerous costly project delays,
and FNG had underbid on a number of contracts due to overly optimistic cost estimates.
(Id.). At some point in 2015, FNG began having trouble paying subcontractors and
suppliers on various contracts bonded by Western. (See Surety Claim Payment
Spreadsheet, Ex. 107). These subcontractors and suppliers submitted claims to
Western. By the time of the May 3, 2016, motion hearing, Western had paid
$7,748,144.68 to settle various claims. (Projected Loss Summary, Ex. 117; Surety
Claim Payment and Recoveries, Ex. 106).
Western’s claims counsel, Mr. Felty, tried to “work out” a “payment plan” with
FNG, so that FNG could reimburse Western for its losses, but FNG never agreed to a
plan. (5/3/16 Hr’g Test. of Trey Felty [hereinafter Felty Hr’g Test.]; see also Repayment
Agreement Demand Email, Ex. 118). FNG did agree to transfer to Western
approximately $400,000 in payments it had received on one of its Western-bonded
contracts, but FNG did not follow through with the agreement and never fully explained
where the $400,000 went. (Felty Hr’g Test.; Email Regarding Northerly Island Project,
Ex. 124). Mr. Felty also discovered that in April 2015 FNG had factored some of its
receivables with defendant Capital, including receivables on at least one Westernbonded contract. (Felty Hr’g Test.; see also Instrument of Assignment to Capital
Funding Solutions, Ex. 120).
-5-
After the payment-plan talks failed, Western mailed a letter to the Indemnitors2 in
September 2015 demanding that they deposit approximately $6 million in cash or cash
equivalents with Western, pursuant to the collateral-security clause of the indemnity
agreement. (Collateral Demand Letters, Ex. 103). Western attached a list of all of the
claims it had paid thus far. Western mailed a second letter in February 2016
demanding $8,250,000. (Id.).
The Indemnitors never deposited the requested collateral. However, FNG has
executed instruments of assignment on all five of its outstanding Western-bonded
contracts. (Felty Hr’g Test.).3 Under the instruments of assignment, the government’s
payments on the contracts go to an escrow agent, rather than to FNG. (See id.). FNG
continues to provide project management services on at least three of these contracts
however, at a cost to itself of approximately $30,000 per contract per month. (Mehta
Hr’g Test.; see also Felty Hr’g Test.). The escrow agent has received over $3 million4 in
government payments on the assigned contracts. (Projected Loss Summary, Ex. 117).
The escrow agent has paid $572,737.50 from this account to Western to reimburse
2
Actually, the letter was addressed only to Parimal Mehta and another FNG
employee. (See Collateral Demand Letters, Ex. 103). The parties have agreed,
however, that the letter was effectively a demand on all of the Indemnitors. (See Doc.
20; Doc. 35-2 ¶ 7).
3
Mr. Felty’s hearing testimony on this point was not entirely consistent. He
initially admitted that there had been an assignment on all of FNG’s ongoing Westernbonded contracts. He then testified that “I wouldn’t say all” of the remaining contracts
had been assigned. He was unable to identify a single Western-bonded contract that
had not been assigned, however.
4
All amounts in this paragraph are based on exhibits submitted at the May 3,
2016, motion hearing. The actual amounts might have changed somewhat since then.
Ultimately, the exact amounts are immaterial to the Court’s ruling on the instant motion.
-6-
Western for its bond payments. (Id.). Western has also recovered $7,487 directly from
FNG. (Id.). This means that Western’s net losses currently stand at $7,167,919.28.
(Id.). Based on Western’s estimates of the remaining government payments, the
amounts of the currently pending claims under the bonds, and the costs to complete the
Western-bonded contracts, Western estimates that its losses under the bonds will
ultimately total $7,480,647.28. (Id.). Western has also incurred various “costs and
expenses,” such as “professional fees,” and likely will continue to incur such expenses
as litigation in this case continues. (3/15/16 Felty Aff., Ex. 105, ¶ 8). As of mid-March
2016, those expenses totaled $185,720.97. (Id.).
In addition to demanding that the Indemnitors post collateral, Western filed a
U.C.C. financing statement with the Michigan Department of State in June 2015,
announcing Western’s security interest in “all property, rights, and assets of the
Indemnitors, including, but not limited to, all inventory, equipment, instruments,
investments, contract rights and proceeds, insurance, accounts, and deposits.” (U.C.C.
Search Report for FutureNet Group, Ex. 511). This quoted language mirrors the
language in the security-interest clause of the indemnity agreement. (General
Agreement of Indemnity ¶ 10). In a subsequent amendment filed with the Michigan
Department of State, Western attached the indemnity agreement. (See (U.C.C. Search
Report for FutureNet Group). Multiple other creditors also have security interests in the
personal property of various of the Indemnitors. (See U.C.C. Search Report for
FutureNet Group; see also U.C.C. Search Report for FutureNet Security Solutions, Ex.
513). In particular, nonparties Plymouth Venture Partners and Fifth Third Bank and
defendant Capital all have security interests that appear to have been perfected prior to
-7-
Western’s security interest. (See U.C.C. Search Report for FutureNet Group; U.C.C.
Search Report for FutureNet Security Solutions).5 Moreover, nonparty Lexon Surety,
which, like Western, bonded various contracts for FNG, also has a security interest.
(See U.C.C. Search Report for FutureNet Group). According to a liquidation analysis
prepared by the consulting firm Conway MacKenzie, FNG currently owes some $2
million to Capital, $10 million to Plymouth Venture Partners, $850,000 to Fifth Third
Bank, and $6 million to Lexon Surety. (FutureNet Liquidation Analysis Prepared by
Conway MacKenzie, Ex. 513). According to the liquidation analysis, if FNG were to be
liquidated now and if the proceeds were to be used to pay FNG’s creditors, Capital
would be paid in full, Plymouth Venture Partners would be paid in part, and Fifth Third
Bank would receive nothing. (See id.). Western and Lexon would each recover a
fraction of what they are owed. (See id.).
Parimal Mehta testified that if the Court were to order the Indemnitors to post
collateral now, FNG would go out of business. (Mehta Hr’g Test.). However, he
explained that although FNG’s construction business is no longer financially viable,
FNG’s IT business and FNSS’s active-barrier business are both very profitable and are
expanding. (Id.). FNG plans to close down its construction business and focus on IT
and the active barriers. (Id.). Thus, Mr. Mehta believes that Western may receive a
more substantial recovery if the Indemnitors are not forced to post collateral at this time
and if FNG is able to successfully restructure its business. (Id.). FNG faces significant
5
Unlike Western, these three entities do not appear to have a security interest in
the personal property of the three individual Indemnitors (Parimal Mehta, Dipika Mehta,
and Jignesh Mehta), however. (See U.C.C. Search Report for FutureNet Group;
U.C.C. Search Report for FutureNet Security Solutions)
-8-
financial obstacles, however, even if it is not forced to post collateral at this time. FNG
currently does not have a traditional source of credit and has relied on factoring services
provided by Capital. (Id.). FNG plans to enter another nontraditional financing
arrangement with a company called Money Works Direct so that FNG will be able to
make payroll. (See Defs.’ Emergency Mot., Doc. 35; see also Money Works Direct
Factoring Agreement, Doc. 35-3; Mehta Hr’g Test.). FNG would receive some
$750,000 under the arrangement and would have to pay back close to $1 million within
a year. (Mehta Hr’g Test.). FNG is working with the Michigan Economic Development
Organization and Invest Detroit to find a new traditional lender. (Id.).
If FNG and its subsidiaries were to go out of business now, over 200 employees
would lose their jobs. (Mehta Hr’g Test.). Only thirty of those employees are involved in
FNG’s construction business. (Id.). Mr. Mehta also contends that national security
would be imperilled if FNG were to go out of business, since FNG provides IT services
to the federal government and since FNSS provides and services active barriers
installed at hundreds of government installations. (Id.). In particular, Mr. Mehta
believes that only FNSS can service the active barriers because FNSS “ha[s] the
patents.” (Id.).
As mentioned above, Western and the Indemnitors earlier reached an agreement
in lieu of the Court’s entry of a temporary restraining order. (See Doc. 20). Under the
agreement, the Indemnitors generally agreed not to transfer or encumber any of their
assets except in the ordinary course of business or to pay for necessary living
expenses. (See Doc. 35-2 ¶¶ 1, 2). The parties agreed that the restriction will remain in
effect until the Court rules on the preliminary-injunction motion. (Id. ¶ 2).
-9-
III. LEGAL STANDARD
The purpose of a preliminary injunction “‘is merely to preserve the relative
positions of the parties until a trial on the merits can be held.’” Findlay Truck Line, Inc.
v. Cent. States, Se. & Sw. Areas Pension Fund, 726 F.3d 738, 746 n.4 (6th Cir. 2013)
(quoting Univ. of Tex. v. Camenisch, 451 U.S. 390, 395 (1981)); see also Harlem
Algonquin LLC v. Canadian Funding Corp., 742 F. Supp. 2d 957, 962 (N.D. Ill. 2010)
(“[P]reliminary injunctive relief is not appropriate if it gives to a plaintiff ‘the actual
advantage which would be obtained in a final decree.’” (quoting W.A. Mack, Inc. v.
General Motors Corp., 260 F.2d 886, 890 (7th Cir. 1958))). The party seeking the
preliminary injunction bears the burden of proving that “the circumstances clearly
demand” the requested injunctive relief. Serv. Employees Int'l Union Local 1 v. Husted,
698 F.3d 341, 344 (6th Cir. 2012) (quoting Overstreet v. Lexington-Fayette Urban Cty.
Gov’t, 305 F.3d 566, 573 (6th Cir. 2002)) (internal quotation marked omitted). A court
must consider four factors in deciding whether to grant a preliminary injunction
(1) whether the movant has a strong likelihood of success on the merits;
(2) whether the movant would suffer irreparable injury without the
injunction; (3) whether issuance of the injunction would cause substantial
harm to others; and (4) whether the public interest would be served by
issuance of the injunction.
Mich. Catholic Conference & Catholic Family Servs. v. Burwell, 807 F.3d 738, 746 (6th
Cir. 2015) (quoting Jolivette v. Husted, 694 F.3d 760, 765 (6th Cir. 2012)) (internal
quotation marks omitted). “These factors are not prerequisites that must be met, but
are interrelated considerations that must be balanced together.” Mich. Coal. of
Radioactive Material Users, Inc. v. Griepentrog, 945 F.2d 150, 153 (6th Cir. 1991); see
also Ohio Republican Party v. Brunner, 543 F.3d 357, 361 (6th Cir. 2008) (“For
-10-
example, the probability of success that must be demonstrated is inversely proportional
to the amount of irreparable injury the movants will suffer absent the [preliminary
injunction].”).
IV. DISCUSSION
As explained below, Western has satisfied its burden of showing that preliminary
injunctive relief is clearly warranted. However, Western has not shown that the
injunction should include an order requiring the Indemnitors to post $8,250,000 in
collateral. Such an order would result in substantial irreparable harm to the Indemnitors
and their over 200 employees. Such an order would not preserve the status quo
pending trial. Rather, the Court will enjoin the Indemnitors from transferring or
encumbering their assets, except in the ordinary course of business or to satisfy
necessary living expenses. The Court will accomplish this by incorporating the existing
agreement between the parties into the instant order. Moreover, the Court will require
the Indemnitors to provide Western with full access to its financial books and records.
A.
Western Has a Strong Likelihood of Success on the Merits.
The first preliminary-injunction factor weighs in favor of Western. Western has a
high likelihood of ultimately succeeding on the merits in its claim for indemnification or
other relief at trial, for a number of reasons.6
6
The Court makes the findings of fact and law in this section only for the purpose
of ruling on the instant motion. Moreover, these findings are based on the evidence
before the Court at this time. The Indemnitors have asserted a number of affirmative
defenses and have denied many of the factual allegations, (See Defs.’ Answer, Doc.
44), and moreover the parties have not yet conducted discovery. So, it is possible that
later evidence will demonstrate that Western is not entitled to relief.
-11-
First, Western is clearly entitled to be collateralized.
According to the language
of the indemnity agreement, the Indemnitors must post collateral when Western “in its
sole discretion . . . shall reasonably determine” the need for collateral, “whether or not
[Western] has made payment” to a creditor. (General Agreement of Indemnity ¶ 3(b)).
Western’s two good-faith demand letters triggered the Indemnitors’ duty to post
collateral under this provision. Cf. United Bonding Ins. Co. v. Stein, 273 F. Supp. 929,
929-30 (E.D. Pa. 1967) (noting that “[i]n the instant case, the only conditions precedent
to defendants' obligation [to post collateral] were the plaintiff's estimate that a reserve
was necessary and its demand upon defendants for current funds in the amount of such
reserve”). Moreover, it is well established that a court may order specific performance
of a collateral-security provision. See, e.g., Am. Motorists Ins. Co. v. United Furnace
Co., 876 F.2d 293, 300 (2d Cir. 1989); Safeco Ins. Co. of Am. v. Schwab, 739 F.2d 431,
433 (9th Cir. 1984). Generally, damages are an insufficient remedy for breach of a
collateral-security clause. See Travelers Cas. & Sur. Co. of Am. v. Padron, No.
5:15-CV-200-DAE, 2015 WL 1981563, at *9 (W.D. Tex. May 1, 2015) (unpublished)
(“The vast majority of courts agree that a surety has no adequate remedy at law when it
seeks specific performance to recover collateral prior to incurring loss.”) (collecting
cases). The reason is that a surety bargains for a collateral-security clause specifically
for the purpose of avoiding a situation in which the surety’s only option to obtain
indemnification is to sue a potentially insolvent indemnitor for damages. “‘If a creditor is
to have the security position for which he bargained, the promise to maintain the
security must be specifically enforced.’” Schwab, 739 F.2d at 433 (quoting Marine
Midland Trust Co. v. Alleghany Corp., 28 F.Supp. 680, 683-84 (S.D.N.Y. 1939)).
-12-
Second, Western is clearly entitled to compensation under the indemnity clause
of the indemnity agreement. The Indemnitors agreed to indemnify and save Western
harmless from any costs incurred by Western under its bond obligations. And they
agreed “to accept the voucher or other evidence of . . . payments [under the bonds] as
prima facie evidence of the propriety thereof.” (General Agreement of Indemnity ¶ 3(a)).
Such “[p]rovisions in indemnity agreements . . . providing that vouchers and other
evidence of payment shall be prima facie evidence of the propriety thereof, have been
upheld as not against public policy and enforced by the courts.” Transamerica Ins. Co.
v. Bloomfield, 401 F.2d 357, 362 (6th Cir. 1968); see also Hanover Ins. Co. v.
Quadrants, Inc., No. 11-11246, 2014 WL 1304328, at *6 (E.D. Mich. Mar. 31, 2014)
(unpublished). As explained in the background section above, Western has presented
evidence documenting its payments under the bonds. This documentation, which is
unrebutted, is sufficient under the prima-facie-evidence clause to establish Western’s
entitlement to be indemnified in the amount of $7.1 million.
Third, Western clearly has a security interest in all of the Indemnitors’ personal
property. By the terms of the indemnity agreement, a default automatically creates a
security interest on the part of Western in all of the Indemnitors’ assets. Moreover, a
default automatically transfers all of the Indemnitors’ rights under the bonded contracts
to Western. A default has occurred, since the Indemnitors failed to comply with, inter
alia, the collateral-security clause of the indemnity agreement. Moreover, Western has
perfected its security interest.
Fourth, Western may be entitled to damages due to the Indemnitors’ apparent
failure to comply with the “actual, equitable, or constructive trust” provision of the
-13-
indemnity agreement. (General Agreement of Indemnity ¶ 11). Western has repeatedly
failed to pay subcontractors and other creditors. This suggests that Western may have
violated its obligation to hold the contract payments in trust for the completion of the
contracts.
Beyond the express terms of the indemnity agreement, Western is also clearly
entitled to relief under its right to equitable subrogation. Under the equitablesubrogation doctrine, “a surety who pays the debt of another is entitled to all the rights
of the person he paid.” Pearlman v. Reliance Ins. Co., 371 U.S. 132, 137 (1962); see
also In re Larbar Corp., 177 F.3d 439, 443-44 (6th Cir. 1999); City of Detroit v. Fid. &
Deposit Co. of Md., 240 Mich. 213, 220-21, 215 N.W. 394, 396 (1927). Western paid
numerous claims on behalf of the Indemnitors and thereby became subrogated to the
rights of these claimants. Therefore, Western may now seek reimbursement from the
Indemnitors pursuant to these claims.
In sum, Western has established that, based on the indemnity agreement,
Western is entitled to be collateralized by the Indemnitors, that it is entitled to be
indemnified for its demonstrated costs thus far, that it has a security interest in all of the
Indemnitors’ personal property, and that it may be entitled to damages under the trust
provision of the indemnity agreement. And Western has also established that it has a
right to equitable subrogation. Thus, Western has a high likelihood of success on the
merits, and therefore the first factor of the preliminary-injunction analysis weighs
strongly in favor of Western.
-14-
B.
Western Is Likely to Suffer Irreparable Harm in the Absence of a
Preliminary Injunction.
The second factor of the preliminary-injunction analysis also weighs in favor of
Western: Western is likely to suffer irreparable injury without an injunction. This is most
clear with respect to Western’s rights under the collateral-security clause. Western
bargained for the collateral-security clause specifically so that Western would not be
placed in a situation in which its only hope of obtaining indemnification is a final
judgment against the possibly judgment-proof Indemnitors. The longer Western has to
wait for the enforcement of the collateral-security clause, the less likely it becomes that
the clause will be effective and that Western will be able to obtain the benefit of its
bargain. See Am. Motorists Ins. Co. v. Pennsylvania Beads Corp., 983 F. Supp. 437,
441 (S.D.N.Y. 1997) (“[A]bsent enforcement of the . . . collateral security clause, plaintiff
could . . . be relegated to an unsecured claim and therefore be forced to share its
debtor’s property with other creditors.”); see also Int’l Fid. Ins. Co. v. Solutions to Every
Problem, Inc., No. 3:12-CV-37, 2012 WL 2576775, at *7 (E.D. Tenn. July 3, 2012)
(unpublished) (“[C]ourts have routinely found that sureties suffer immediate, irreparable
harm if they are denied receipt of collateral after liability has been asserted against
them.” (citation and internal quotation marks omitted)); Amerisourcebergen Corp. v.
Hood Med. Servs., Inc., No. 2:05-CV-794, 2005 WL 2230232, at *2 (S.D. Ohio Sept. 13,
2005) (unpublished).7
7
As the Indemnitors point out, some courts have held that a violation of a
collateral-security provision does not necessarily result in irreparable harm. See Great
Am. Ins. Co. v. Fountain Eng’g, Inc., No. 15-CIV-10068-JLK, 2015 WL 6395283, at
*3-*4 (S.D. Fla. Oct. 22, 2015) (unpublished); Westchester Fire Ins. Co. v. DeNovo
Constructors, Inc., No. 15-CV-7940 (AJN), 2016 WL 1381821, at *2 (S.D.N.Y. Apr. 5,
-15-
Moreover, the evidence in the record shows that FNG is in dire financial straits.
It no longer has a traditional source of credit and is millions of dollars in the hole with
various creditors. The evidence in the record also shows that the Indemnitors have not
always been entirely upfront with Western about its financial situation and that funds
have sometimes disappeared without an adequate accounting. Therefore, the Court
finds that Western would be likely to suffer irreparable injury without some form of
injunction.
But the Court also finds that some protections have been put in place. There is
evidence that the receivables on all of FNG’s outstanding Western-bonded contracts
have been assigned to an escrow agent, thus ensuring that the receipts from these
contracts will no longer be dissipated. The Court also finds that it would be futile to
order the Indemnitors to post collateral. There is substantial evidence that the
Indemnitors would be unable to post collateral at this time, given that most or all of their
assets (with the possible exception of the receivables on the Western-bonded contracts,
2016). One court has reasoned,
[c]ertainly, the purpose of a collateral security clause is to provide sureties
with access to financial cushioning during the pendency of claims and, where
violated, the surety suffers ongoing harm in the form of missing money, but,
whatever the loss, whether to financial security or otherwise, it is monetary
in character, and may be adequately remedied by a judgment on the merits.
Great Am. Ins. Co., 2015 WL 6395283, at *3. The Court finds these cases
unpersuasive. Western specifically bargained for the collateral-security clause and if
something is not done to give it some effect at this stage, Western will never receive the
benefit of that bargain. Moreover, as explained below, in the instant case there is
strong evidence indicating that the Indemnitors are facing serious financial problems,
further confirming that Western is likely to suffer irreparable harm if something is not
done at this point. Finally, given that the Court at this stage will be ordering a freeze on
the Indemnitors’ assets rather than specific performance of the collateral-security clause
per se, the reasoning from these cases is even less applicable.
-16-
which are in any case already protected from dissipation by the escrow arrangement)
are encumbered with several senior creditors’ security interests.8
Therefore, the best way to protect Western from irreparable harm would be to
simply put a freeze on the Indemnitors’ assets. The Indemnitors should not be allowed
to transfer or further encumber their assets, except in the ordinary course of business or
to satisfy necessary personal expenses. Given that the existing agreement between the
parties already accomplishes this, the Court will simply incorporate that agreement by
reference into the instant order. Moreover, the Indemnitors should be required to give
Western full access to their financial books and records. This will enable Western to
ensure compliance and also enable Western to recognize any additional risks and move
for further preliminary injunctive relief if necessary to protect the status quo. See Ohio
Cas. Ins. Co. v. Fratarcangelo, 7 F. Supp. 3d 206, 217 (D. Conn. 2014) (unpublished);
Auto-Owners Ins. Co. v. Randy B. Terry, Inc., No. 5:12-CV-02717-TMP, 2013 WL
6583959, at *8 (N.D. Ala. Dec. 16, 2013) (unpublished).
8
Although Western has contested the Indemnitors’ position that they would be
unable to post collateral, the Court credits Parimal Mehta’s testimony on this point as
well as the Conway MacKenzie liquidation analysis. Even if the Indemnitors could post
collateral, the value of the collateral would be substantially discounted due to the
numerous senior encumbrances.
The Court also concludes from Mr. Mehta’s testimony and the Conway
MacKenzie analysis that FNG would go out of business and be forced to liquidate if the
Court ordered the Indemnitors to post collateral now. The Conway MacKenzie analysis
shows that Western would receive only a small recovery under such a scenario.
The Court is admittedly not convinced that FNG will ever be able to recover and
pay Western more at a later time. Mr. Mehta testified that he is trying to restructure
FNG to get rid of its unsuccessful construction business and focus entirely on security
and IT, but the Court is skeptical given FNG’s high level of debt and its lack of a
traditional credit source. But this does not negate the fact that Western would likely
gain little or nothing from an order requiring the Indemnitors to post collateral at this
time.
-17-
C.
A Freeze on the Transfer of Assets Would Appropriately Balance the
Risk of Harm to Western with the Risk of Harm to the Indemnitors.
The third factor weighs against granting Western’s requested remedy. There
would likely be substantial harm to the Indemnitors and to their employees if the Court
were to order the Indemnitors to immediately post $8,250,000 in collateral. However,
while the Indemnitors would likely face some hardship if they were enjoined from
transferring or encumbering their assets, this harm would be far less serious and
irreparable. Thus, this would be a much more appropriate remedy.
The Court finds that FNG (and thus FNSS and Motor City) would likely be forced
out of business if the Court were to order the Indemnitors to post $8,250,000 in
collateral. The Court also finds that this would result in the loss of at least 200 jobs.
This would be a substantial harm to the Indemnitors and to the Indemnitors’ employees,
and it would be a harm that could not be undone if the Indemnitors were later to prevail
on the merits. See Performance Unlimited, Inc. v. Questar Publishers, Inc., 52 F.3d
1373, 1382 (6th Cir. 1995) (“The impending loss or financial ruin [of a party’s] business
constitutes irreparable injury.”); see also Contech Casting, LLC v. ZF Steering Sys.,
LLC, 931 F. Supp. 2d 809, 818 (E.D. Mich. 2013); Connors v. Shannopin Min. Co., 675
F. Supp. 986, 991 (W.D. Pa. 1987) (declining to issue a preliminary injunction ordering
the defendant to make payments to which the plaintiff was clearly entitled, because the
injunction would have “forc[ed] [the defendant] into insolvency and eliminat[ed]
[numerous] jobs”).9 The Court is unpersuaded, however, that the dissolution of the
9
Western argues that the mere fact that an injunction would result in financial
hardship to the enjoined party is insufficient to justify the denial of a preliminary
injunction. See, e.g., Hanover Ins. Co. v. Holley Const. Co. & Associates, No. 4:11-CV-18-
Indemnitors’ businesses would result in harm to their clients, including the federal
government. Other than Parimal Mehta’s fairly conclusory testimony on this point, the
Court sees no reason to conclude that FNG’s and FNSS’s clients would be unable to
find a substitute company to supply IT or security services. At any rate, the likely harm
to the Indemnitors and their employees is more than enough to constitute a substantial
harm.
The Indemnitors and their employees will suffer less harm if the Court simply
orders the Indemnitors not to transfer or encumber their assets except in the ordinary
course of business or to satisfy necessary living expenses. The Indemnitors will still
suffer some harm—they will likely have more difficultly obtaining new financing to keep
FNG afloat, for example. But the harm would be far less severe. Moreover, given the
risk of irreparable harm to Western, as explained in the immediately preceding section,
some harm to the Indemnitors is acceptable.
D.
The Public Interest Weighs in Favor of Granting Some Limited
Preliminary Injunctive Relief.
The fourth preliminary-injunction factor weighs in favor of granting limited
preliminary injunctive relief. The public interest would likely be harmed if the Court were
to order relief that would put FNG, FNSS, and Motor City out of business, but the public
interest would also be harmed if the Court did nothing to protect Western’s rights.
41 CDL, 2012 WL 398135, at *6 (M.D. Ga. Feb. 7, 2012) (unpublished). But the
Indemnitors face more than mere financial hardship. Rather, they face the complete
loss of their businesses. Moreover, hundreds of employees face potential
unemployment.
-19-
The Court rejects the Indemnitors’ argument that requiring the Indemnitors to
post collateral—thus forcing them out of business—would harm the public interest by
compromising national security. Courts have unsurprisingly acknowledged that
“national security [is] a ‘public interest of the highest order.’” Stagg P.C. v. U.S. Dep’t of
State, No. 15-CV-8468, 2016 WL 316859, at *4 (S.D.N.Y. Jan. 26, 2016) (quoting ACLU
v. Clapper, 785 F.3d 787, 826 (2d Cir. 2015)); see also Winter v. Nat. Res. Def. Council,
Inc., 555 U.S. 7, 26 (2008) (refusing to preliminarily enjoin Navy training exercises
which were allegedly harming whales because “[t]he public interest in conducting
training exercises with active sonar under realistic conditions plainly outweighs the
interests advanced by the plaintiffs”); Battelle Energy All., LLC v. Southfork Sec., Inc.,
980 F. Supp. 2d 1211, 1221-22 (D. Idaho 2013); Advanced Rotorcraft Tech., Inc. v. L-3
Commc'ns Corp., No. C 06-06470 WHA, 2007 WL 437682, at *10 (N.D. Cal. Feb. 6,
2007) (unpublished). But the Court is unpersuaded that national security would be
threatened if FNG and its subsidiaries were to go out of business. As explained in the
background section, FNSS manufactures active vehicle barriers and has installed them
at over 500 military installations and other federal installations. FNSS also services
these barriers. Moreover, FNG provides IT services to the federal government. But
there is no evidence, other than Parimal Mehta’s conclusory testimony, that the federal
government would be unable to find another company to service the active vehicle
barriers or provide IT services if FNG and its subsidiaries were to go out of business.
Mr. Mehta testified that only FNSS “ha[s] the patents” for the active vehicle barriers, but
it is unclear why this would disable other companies from servicing the barriers.
-20-
Moreover, another company could—and, given the ostensible profitability of the activebarrier product, probably would—purchase the patents.
However, the Court agrees with the Indemnitors’ argument that the public interest
weighs against the destruction of jobs. See generally Connors v. Shannopin Min. Co.,
675 F. Supp. 986 (W.D. Pa. 1987). Given that the Indemnitors’ companies would
almost certainly be forced out of business if the Court were to order them to immediately
post $8,250,000 in collateral, the public interest weighs against such an order.
The public interest weighs in favor of granting some form of preliminary relief,
though, because the public interest generally weighs in favor of enforcing freely
negotiated contracts. See Am. Motorists Ins. Co. v. Pennsylvania Beads Corp., 983 F.
Supp. 437, 441 (S.D.N.Y. 1997) (“If anything, public policy considerations dictate
against [requiring a creditor to wait until trial to be awarded relief], since it is that precise
situation which [the creditor] sought to avoid in bargaining for the collateral security
clause.”). Moreover, surety companies that issue bonds for government construction
projects provide a necessary service. See First Nat’l. Ins. Co. of Am. v. Sappah Bros.
Inc., 771 F. Supp. 2d 569, 575-76 (E.D.N.C. 2011). These bonds protect both the
government as well as the subcontractors and suppliers. See id. If courts fail to
enforce the indemnity agreements signed as part of these surety arrangements, then
“the conditions under which sureties issue bonds may be altered[,] . . . thereby
‘frustrat[ing] the government’s interest in protecting taxpayer money and those who
provide labor on public projects.’” Id. at 576 (quoting Travelers Cas. & Sur. Co. v.
Ockerlund, No. 04 C 3963, 2004 WL 1794915, at *6 (N.D. Ill. Aug. 6, 2004)
(unpublished)).
-21-
Therefore, the Court concludes that the public interest weighs against forcing the
Indemnitors to post collateral at this time but weighs in favor of granting more limited
preliminary injunctive relief. In particular, the Court concludes that an order enjoining
the Indemnitors from transferring or encumbering their assets except in the ordinary
course of business or to satisfy necessary living expenses and requiring the Indemnitors
to provide full access to their financial records would adequately protect the public
interest. Because the agreement between the parties (Doc. 35-2) already contains the
restriction on transferring or encumbering assets, the Court will incorporate that
agreement by reference in the instant order.
E.
Western Will Not Be Required to Post Security.
Federal Rule of Civil Procedure 65(c) provides that a “court may issue a
preliminary injunction or a temporary restraining order only if the movant gives security
in an amount that the court considers proper to pay the costs and damages sustained
by any party [later] found to have been wrongfully enjoined or restrained.” Despite the
seemingly mandatory language of Rule 65(c), the Sixth Circuit has repeatedly held that
a district court may, within its discretion, properly decline to require the posting of
security. Appalachian Reg’l Healthcare, Inc. v. Coventry Health & Life Ins. Co., 714 F.3d
424, 431 (6th Cir. 2013); Moltan Co. v. Eagle-Picher Indus., Inc., 55 F.3d 1171, 1176
(6th Cir. 1995). In the instant case, there is no reason for the Court to require Western
to post security. If the Indemnitors are wrongfully harmed as a result of the instant
order, they will be able to obtain appropriate relief in the form of damages against
Western. Western is a large and apparently solvent surety company and thus there is
no reason to require it to post security in advance.
-22-
V. CONCLUSION
Western’s motion for a preliminary injunction (Doc. 2) is GRANTED IN PART and
DENIED IN PART. The Court INCORPORATES into the instant order the terms of the
Standstill and Negative Pledge Agreement (Doc. 35-2) in its entirety and ORDERS that the
prescriptions and proscriptions therein SHALL have the same effect as if expressly ordered
by this Court. In particular, the Indemnitors SHALL NOT transfer, encumber, or dispose
of their assets except as permitted by the terms of that agreement. IT IS FURTHER
ORDERED that the Indemnitors SHALL grant full access to their financial books and
records to Western.
IT IS SO ORDERED.
Dated: June 8, 2016
s/George Caram Steeh
GEORGE CARAM STEEH
UNITED STATES DISTRICT JUDGE
CERTIFICATE OF SERVICE
Copies of this Order were served upon attorneys of record on
June 8, 2016, by electronic and/or ordinary mail.
s/Marcia Beauchemin
Deputy Clerk
-23-
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?