Insurance Company of the West v. H&G Contractors, Inc., et al.
Filing
21
ORDER granting 20 Motion for Default Judgment.(Signed by Judge Janis Graham Jack) Parties notified.(sscotch, )
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
CORPUS CHRISTI DIVISION
INSURANCE COMPANY OF THE WEST,
Plaintiff,
VS.
H&G CONTRACTORS, INC., et al,
Defendants.
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CIVIL ACTION NO. C-10-390
ORDER
On this day came on to be considered Plaintiff Insurance Company of the West’s Motion
for Default Judgment as to Defendant Gary S. Garnett. (D.E. 20.) For the reasons stated herein
Plaintiff’s Motion for Default Judgment is GRANTED.
I.
Jurisdiction
This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1332,
as the parties are completely diverse and the amount in controversy exceeds $75,000. (D.E. 1 at
1-2.)
II.
Factual and Procedural Background
This action was filed in this Court on December 3, 2010, and reinstated after dismissal on
March 10, 2011. (D.E. 1; D.E. 9.) Plaintiff (the “Surety”) alleges that it issued performance and
payment bonds on behalf of H & G Contractors, Inc (“H &G”) in connection with construction
projects in and around Corpus Christi, Texas. (D.E. 1 at 2-3.) H & G was named as the
principal on the bonds. (Id.)
On or about May 17, 2006, H & G and Gary S. Garnett (collectively the “Indemnitors”)
executed a General Indemnity Agreement (the “Indemnity Agreement”) in favor of Plaintiff for
any and all loss or expense Plaintiff incurred in connection with issuing the Bonds. (Id. at 3.)
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The Indemnity Agreement included both indemnification and collateral clauses under which the
Indemnitors agreed to indemnify the Surety against liability for losses and expenses. (Id. at 3-4.)
On or about August 12, 2010, H & G informed the Surety that it would no longer be able
to perform its obligations under the bonded contracts and was in default. (Id. at 4.) H & G then
abandoned its Laguna Shores project, resulting in a notice of suspension from the City of Corpus
Christi on August 20, 2010. (Id.) In October 2010, H & G officially ceased operations and
began to demobilize its projects. (Id.) Consequently, project owners began issuing notices of
default and intent to terminate contracts with H & G. (Id.) At the filing of the Complaint, the
Surety estimated losses under the bonds of over $3,000.000. (Id.) The Surety contends that as
signatories to the Indemnity Agreement, the Indemnitors have an obligation to indemnify and
exonerate the Surety from any loss. (Id.)
Plaintiff brings claims for breach of the Indemnity Agreement and common law
indemnity. (Id. at 4-5.) Plaintiff seeks specific performance of the indemnity agreement, along
with recovery of attorney’s fees and expenses. (Id. at 6-7.) Plaintiff also seeks relief in the form
of exoneration and quia timet. (Id. at 7.)1
On April 6, 2011, the Court held an initial pre-trial conference. At the hearing, counsel
for H & G represented to the Court that H & G had filed Chapter 7 Bankruptcy. Counsel then
made an oral motion to refer this action to the Bankruptcy Court. The Court granted the Motion
on April 7, 2011, and retained the case against Defendant Garnett. (D.E. 17.)
1
Exoneration is the equitable right of a surety to compel its principal to pay his or her debt and thereby discharge
the surety's obligation under its bond. See Filner v. Shapiro, 633 F.2d 139, 142 (2d Cir.1980). Quia timet is the right
of the surety to compel its principal to place the surety “in funds” sufficient to prevent anticipated future losses,
where a surety has reasonable grounds to believe that its principal will not perform his obligations. In re Gas
Reclamation, Inc. Securities Litigation, 741 F.Supp. 1094, 1105 (S.D.N.Y. 1990).
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On April 1, 2011, the Surety filed proof of service with the Court showing that Defendant
Garnett was served with a copy of the Surety’s Original Complaint on March 25, 2011. (D.E.
12.) More than twenty-one days passed since the date of service of process and Garnett failed to
answer. On April 19, 2011, the Surety requested an Entry of Default against Garnett. (D.E. 18.)
On June 15, 2011, the Clerk entered a Clerk’s Entry of Default against Garnett. (D.E. 19.)
On September 13, 2011, the Surety filed a Motion for Default Judgment against
Defendant Garnett. (D.E. 20.) Per Defendant Garnett’s breach of the Indemnity Agreement, the
Surety seeks a default judgment of $1,388,400.14 plus court costs and post-judgment interest.
(Id.) The response deadline was October 4, 2010 and Garnett failed to respond. (See Local
Rules 7.3, 7.4.)
III.
Discussion
A.
Default Judgment
In the Fifth Circuit there are three steps to obtaining a default judgment: (1) default; (2)
entry of default; and (3) default judgment. New York Life Ins. Co v. Brown, 84 F.3d 137, 141
(5th Cir. 1996). A default occurs when “a defendant has failed to plead or otherwise respond to
the complaint within the time required by the Federal Rules.” Id. The clerk will enter an entry
of default when default is established by affidavit or otherwise.2 Id. After the clerk’s entry of
default, “a plaintiff may apply for a judgment based on such default. This is a default
judgment.” Id. (emphasis in original) (citations and footnote removed).
2
The plaintiff is responsible for properly serving all defendants with summons and a copy of the complaint. Fed. R.
Civ. P. 4(c) (1). Once served, a defendant must file a reply to the complaint within 21 days of service. Fed. R. Civ.
P. 12(a)(1)(A)(i). “Until the plaintiff serves the defendant, the defendant has no duty to answer the complaint and
the plaintiff cannot obtain a default judgment.” Rogers v. Hartford Life & Accident Ins. Co., 167 F.3d 933, 937 (5th
Cir. 1999). Federal Rule of Civil Procedure 4 provides various methods of perfecting service upon different types of
defendants such as delivering a copy of the summons and the complaint personally. Fed. R. Civ. P. 4(b)(2)(A). In
this case, the return of service concerning Defendant Garnett shows that the summons and a copy of the complaint
were personally delivered in compliance with Rule 4(e). (D.E. 12.)
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After the entry of default by the clerk, a default judgment may be entered against parties
that have appeared in the action “either personally or by a representative.” Fed. R. Civ. P.
55(b)(2).3 Rule 55(b)(2) also requires that written notice be given of an application to the court
for entry of default judgment. Id. Rule 55(b)(2) does not however require the district court to
hold an evidentiary hearing or oral argument before entering a default judgment. SUA Ins. Co.
v. Buras, 421 Fed.App’x 384, 384 (5th Cir. 2011) (per curiam) (unpublished) (citing Sec. and
Exch. Comm’n v. First Fin. Group of Texas, 659 F.2d 660, 669 (5th Cir. 1981)). See also Turner
v. Salvatierra, 580 F.2d 199, 201 (5th Cir. 1978) (notice is required under Rule 55(b)(2) when
the party against whom the claim is made has made an appearance, even when the claim is for a
sum certain); 10A C. Wright, A. Miller & M. Kane, Federal Practice and Procedure § 2688 at 5758 (3d ed. 1998). Here, both Defendant and Defendant’s counsel were served with notice of
Plaintiff’s Motion for a Default Judgment via certified mail on September 13, 2011. (D.E. 20 at
4.) As a result, the Court sees no procedural bar to the entry of default judgment.
The Fifth Circuit favors resolving cases on their merits and generally disfavors default
judgments. Rogers v. Hartford Life & Accident Ins. Co., 167 F.3d 933, 936 (5th Cir. 1999). See
also Sun Bank of Ocala v. Pelican Homestead & Sav. Ass’n, 874 F.2d 274, 276 (5th Cir. 1989)
(“Default judgments are a drastic remedy, not favored by the Federal Rules and resorted to by
the courts only in extreme situations.”).
This policy however, is “counterbalanced by
considerations of social goals, justice and expediency, a weighing process [that] lies largely
within the domain of the trial judge’s discretion.” Rogers, 167 F.3d at 936 (quoting Pelican
Prod. Corp. v. Marino, 893 F.2d 1143, 1146 (10th Cir. 1990) (internal quotations omitted)). See
3
In this case, Plaintiff served Defendant Garnett on March 26, 2011. (D.E. 12.) At the initial pretrial conference on
April 6, 2011, John Cromwell represented to the Court that he was serving as counsel for H & G and Defendant
Garnett. Thus, Garnett made an appearance” for purposes of Rule 55(b)(2). See 10A C. Wright, A. Miller & M.
Kane, Federal Practice and Procedure § 2686 at 41 (3d ed. 1998) (noting that an appearance generally requires a
presentation or submission to the court).
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also Merrill Lynch Mortg. Corp. v. Narayan, 908 F.2d 246, 253 (7th Cir. 1990) (noting that
default judgments allow courts to manage their dockets “efficiently and effectively”).
When making a determination as to whether to enter a default judgment district courts are
to consider the following factors: (1) whether material issues of fact are at issue; (2) whether
there has been substantial prejudice (3) whether grounds for default are clearly established (4)
whether default was caused by good faith mistake or excusable neglect; (5) harshness of default
judgment; and (6) whether the Court would feel obligated to set aside default on defendant’s
motion.4 Lindsey v. Prive Corp, 161 F.3d 886, 893 (5th Cir. 1998). Any doubt, however, as to
whether to enter or set aside a default judgment must be resolved in favor of the defaulting party.
See id.; Davis v. Parkhill–Goodloe Co., Inc., 302 F.2d 489, 495 (5th Cir. 1962).
Applying these factors to the present case the Court finds that the perquisites for default
judgment satisfied. Defendant has not filed any responsive pleadings, and thus there are no
material facts in dispute. Lindsey, 161 F.3d at 893; Nishimatsu Constr. Co. v. Houston Nat.
Bank, 515 F.2d 1200, 1206 (5th Cir. 1975) (noting that “[t]he defendant, by his default, admits
the plaintiff's well pleaded allegations of fact”). Defendant’s failure to respond threatens to bring
the adversary process to a halt, effectively prejudicing Plaintiff's interests. Lindsey, 161 F.3d at
893; see also Sun Bank, 874 F.2d at 276. Further, there is no evidence indicating that “a good
faith mistake or excusable neglect” caused the default, and Defendant has had ample time to
4
As to the sixth factor listed, entry of default can be set aside for “good cause.” Fed. R. Civ. P. 55(c). Factors used
by the Fifth Circuit to determine “good cause” include: (1) whether the default was willful; (2) whether setting it
aside would prejudice the adversary; and (3) whether a meritorious defense is presented. CJC Holdings, Inc. v.
Wright & Lato, Inc., 979 F.2d 60, 64 (5th Cir. 1992). These factors appear to be subsumed by the default judgment
factors listed in Lindsey, making the sixth factor in Lindsey a “catch-all,” so that default judgment must be denied
wherever
“good
cause”
sufficient
to
set
aside
default
exists.
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answer, mitigating the harshness of a default judgment. Lindsey, 161 F.3d at 893. See e.g., Elite
v. The KNR Group, 216 F.3d 1080 (Table), 2000 WL 729378, at *1 (5th Cir. May 19, 2000) (per
curiam) (holding default judgment to be inappropriate where defendant sent a letter to the court
apprising the court that his failure to appear was due to financial privation). Moreover, Plaintiff
only seeks the relief for which it is entitled to under the Indemnity Agreement. See Helena
Chemical Co. v. Goodman et al., No. 5:10-cv-121, 2011 WL 1532200, at *5 (S.D. Miss. Apr. 21,
2011). Finally, based on the facts known to the Court at this time, there does not exist any “good
cause” for which it would be obligated to set aside the default if challenged by Defendant. See
Lindsey, 161 F.3d at 893; CJC Holdings v. Wright & Lato, Inc., 979 F.2d 60, 64 (5th Cir. 1992).
“[A] defendant’s default does not in itself warrant the court in entering default judgment.
There must be a sufficient basis in the pleadings for the judgment entered.” Lindsey, 161 F.3d at
893. See also Jackson v. FIE Corp., 302 F.3d 515, 525 n.29 (5th Cir. 2002) (noting that after a
default judgment, the factual allegations of the complaint are taken as true, except regarding
damages); Nishimatsu Constr. Co., 515 F.2d at 1206. In the event of default, the Court must
accept pleaded facts as true, but retains the obligation to determine whether those facts state a
claim upon which relief may be granted. See Lewis v. Lynn, 236 F.3d 766, 767 (5th Cir. 2001)
(per curiam) (holding district court’s refusal to enter default judgment proper because plaintiff’s
factual allegations, even if found true, could not impose liability against defendants).
Plaintiff’s complaint alleges a breach of an indemnity agreement. (D.E. 1 at 4-5.) To
prevail on a breach of indemnity agreement claim under Texas law, a plaintiff must establish five
elements: “(1) a contractual indemnity agreement existed between the [parties], (2) the
agreement obligated the [Defendant] to indemnify [Plaintiff] in the event claims were made on
the bonds issued . . . , (3) claims were made on the bonds issued . . . , (4) all conditions precedent
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for recovery had occurred, been performed, waived, or excused, and (5) [Plaintiff] has been
damaged.” Transamerica Ins. Co. v. Avenell, 66 F.3d 715, 719 (5th Cir. 1995). More generally,
the elements of breach of contract under Texas law are as follows: “(1) the existence of a valid
contract; (2) performance or tendered performance by the plaintiff; (3) breach of the contract by
the defendant; and (4) damages sustained by the plaintiff as a result of the breach.” Crowder v.
Scheirmann, 186 S.W.3d 116, 118-19 (Tex. App. – Houston [1st Dist.] 2005). The Texas
Supreme Court requires that indemnity agreements be strictly construed to give effect to the
parties; intent as expressed in the agreement. Ideal Lease Serv. v. Amoco Prod. Co., 662 S.W.2d
951, 953 (Tex. 1984). See also Associated Indem. Corp. v. CAT Contracting, Inc., 964 S.W.2d
276, 284 (Tex. 1998) (indemnity agreements are construed under the normal rules of contract
construction).
Here, Plaintiff alleges that it entered into an Indemnity Agreement with Defendant
Garnett (as well as with H & G), whereby Defendant Garnett agreed to indemnify Plaintiff for
any and all losses or expenses incurred by Plaintiff in connection with issuing the bonds. (D.E. 1
at 3; D.E. 20-2.) Plaintiff also claims that several claims were made on the bonds by owners of
the construction projects. (D.E. 1 at 4.) Plaintiff alleges that it made a written demand on
Defendant Garnett to fulfill his obligations and indemnify Plaintiff and Defendant Garnett failed
to respond. (Id. at 4.) At the time Plaintiff filed its Complaint, Plaintiff estimated a loss in
excess of $3 million. (Id.) Assuming these allegations to be true, Plaintiff has satisfied the
elements to make out a valid claim for breach of an indemnity agreement.5 See Washington
5
Plaintiff also brought claims for common law indemnity, specific performance, exoneration, and quia timet, (D.E.
1 at 5-7.) Under Texas law however, “the availability of common law indemnity is extremely limited.” Vecellio
Ins. Agency, Inc. v. Vanguard Underwriters Ins. Co., 127 S.W.3d 134, 138 (Tex. App. – Houston [1st Dist.] 2003)
(citing Cypress Creek Util. Serv. Co. v. Muller, 640 S.W.2d 860, 864 (Tex. 1982). In Texas, common law
indemnity is only available in “products liability actions to protect an innocent retailer in the chain of distribution
and in negligence actions to protect a defendant whose liability is purely vicarious in nature.” Id.; B & B Auto
Supply, Sand Pit & Trucking Co. v. Cent. Freight Lines, Inc., 603 S.W.2d 814, 816-17 (Tex. 1980). Thus, Plaintiff
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Intern. Ins. Co. v. Consol. Metroplex Const. Services, L.L.C., No. 4:10-cv-573-A, 2011 WL
1676428 (N.D. Tex. May 3, 2011).
B.
Damages
A defendant’s default concedes the truth of the allegations of the Complaint concerning
the defendant’s liability, but not damages. Jackson, 302 F.3d at 521, 524-25; United States v.
Shipco Gen. Inc., 814 F.2d 1011, 1014 (5th Cir. 1987). Ordinarily, damages will not be awarded
without a hearing or a demonstration by detailed affidavits establishing the necessary facts.
United Artists Corp. v. Freeman, 605 F.2d 854, 857 (5th Cir. 1979). However, when the amount
of damages and/or costs can be determined with certainty by reference to the pleadings and
supporting documents, and when a hearing would not be beneficial, a hearing is unnecessary.
James v. Frame, 6 F.3d 307, 310 (5th Cir. 1993). A sum capable of mathematical calculation is
one that can be “computed with certainty by reference to the pleadings and supporting
documents alone.” Id. at 311 (citations omitted).
In support of its Motion for Default Judgment, the Surety filed an Affidavit of Susan
Karlan, Vice President, Surety Department for Insurance Company of the West. (D.E. 20, Ex.
B.) Karlan’s affidavit lists the performance and payment bonds issued by the Surety at the
request of the Indemnitors. (D.E. 20, Ex. B at 2.) Attached to the affidavit is an itemized
statement of losses and expenses incurred by the Surety on each of those bonds. (D.E. 20, Ex. B
at 13.) Thus, this is amount capable of mathematical calculation and a hearing is not necessary.
See Leedo Cabinetry v. James Sales & Distribution, Inc., 157 F.3d 410, 414 (5th Cir. 1998)
cannot maintain a common law indemnity claim as this is not a products liability action nor is it a negligence action.
Further, specific performance is not a cause of action but rather an equitable remedy that may be used as a substitute
for monetary damages when such damages would not be adequate. Stafford v. Southern Vanity Magazine, Inc., 231
S.W.3d 530, 535 (Tex. App. – Dallas 2007) (citations omitted). Lastly, Plaintiff’s Motion for Default Judgment
does not request that the Court enforce its rights to exoneration and quia timet. As such, the Court will refrain from
determining whether Plaintiff is entitled to such relief.
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(evidentiary hearing on damages unnecessary where affidavit and supporting documents
demonstrated amount owed to the plaintiff).
III.
Conclusion
For the reasons set forth above, the Court GRANTS Plaintiff’s Motion for Default
Judgment as to Defendant Gary S. Garnett in the amount of $1,388,400.14 (plus court costs and
post-judgment interest at .11% per annum.)
SIGNED and ORDERED this 5th day of October, 2011.
___________________________________
Janis Graham Jack
Senior United States District Judge
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