Enforcing Your Collateral Demand
April 19, 2022
In a recent blog post on March 15, 2022, titled “Some Thoughts on the Collateral Demand” we discussed the mechanics of making the demand – following the requirements of the indemnity agreement, making the demand reasonable, perfecting your security interest in the collateral, using collateral agreements and what to do if there is no collateral demand provision in your indemnity agreement. If you missed it, check it out. In today’s post we will talk about enforcement of the surety’s collateral demand. Basically, enforcement of the collateral demand is where the surety has made the demand, the principal has not provided the collateral, and the surety wants to enforce its demand through the courts. Typically, counsel will use either injunctive relief or specific performance to try to enforce the collateral demand.
Recently, we were reviewing case law from around the country relating to a surety’s enforcement of its collateral demand preparing for a Surety Today Podcast episode. We found about 16 cases over the course of a six or seven month period that dealt with the issue. In ten of the cases, the court upheld the surety’s right to collateral, but in six of the cases the relief was denied. So, the surety made demand, and the demand was either ignored or refused by the indemnitors and the surety went to court and filed a lawsuit in order to get injunctive relief or specific performance and the court denied that relief. I think it is worthwhile to take a look at those six cases where relief was denied and see if there is anything that can be learned.
1. Irreparable Harm
In several of the denial cases, injunctive relief was selected as the vehicle to enforce the surety’s collateral demand. In order to obtain injunctive relief there are a number of elements that must be proven. The element that was a stumbling block in some of these cases was – demonstration of irreparable harm. Basically, under the irreparable harm element of injunctive relief, you have to show that if the relief you are requesting is not granted, you will be harmed in a way that cannot be compensated in money damages. So, the courts will look at a surety’s collateral demand and say that the surety is demanding money, the indemnitors are not paying the money, and the surety wants the court to order the principal to pay the money. To some courts, this looks a lot like money damages and the court may find that the surety is not showing irreparable harm. The key is to get the court to focus on the fact that the surety has certain contractual rights under the Indemnity Agreement, as well as common law rights, to be protected through obtaining the collateral. The only way to preserve those rights and give the surety the “benefit of its bargain” is to enforce the terms of the indemnity agreement and order compliance.
2. Delay
In two of the cases where relief was denied, delay in seeking to enforce the collateral demand was cited as the issue by the court. The surety in those cases delayed in seeking to enforce its rights under the collateral demand provision, and one court cited the old equity maxim that equity aids the vigilant and not the party who slumbers on its rights. So, the take away here is the surety does not want to be found slumbering on its rights. In one of the cases, the delay was only six months; the other was about a year and a half. Basically, the courts said if you are going to wait around and delay in enforcing your rights, that tells the court that you are not really seeking to avoid irreparable harm. So, the courts may use delay against the surety if they can.
3. GAI Language Is Not Always Enough
In the terms of many Indemnity Agreements there will be express provisions stating that the surety will be irreparably harmed if the indemnitors do not provide collateral or state that the surety is entitled to injunctive relief to enforce the collateral provision. One of the decisions denying the surety’s collateral demand made a point of noting that such language does not bind the court. The court essentially said we look at each case on its merits and we determine if the right to injunctive relief exists. If it does, the court will enforce it, but it if does not the court will not, and what the parties put in the indemnity agreement is not necessarily going to make any difference. So, the surety cannot be too over confident in the terms of its indemnity agreement when it comes to seeking injunctive relief.
4. Sometimes in Certain Jurisdictions It’s Just Difficult to Enforce
The final point to take away from these cases, is that sometimes it is just difficult depending on the jurisdiction you are in. In one of the denial cases, the motion for enforcement for injunctive relief was unopposed! The indemnitor did not oppose the motion, but the court still denied it anyway. It just shows the mindset of the court in that jurisdiction, that basically you have to go a long way to establish the right of injunctive relief. While some jurisdictions may be stingy, others may be more friendly. For example, in Maryland the state rules expressly provide that injunctive relief may not be denied solely because money damages are sought. This rule helps get the surety over the irreparable harm element.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.