Surety Case Law Note: California Court Issues Preliminary Injunction Requiring Indemnitors To Post Collateral
September 17, 2024
In this Surety Today: The Blog post we consider a Case Law Note addressing the issue of obtaining a mandatory preliminary injunction requiring the indemnitors to post collateral under California law.
The case is:
Int’l Fid. Ins. Co. v. TA Partners, LLC, No. 8:24-CV-00264-JVS-ADS
2024 WL 3915175, at *1–7 (C.D. Cal. July 29, 2024)
In this case the sureties sued the Indemnitors for breach of contract, specific performance, and quia timet. Initially, International Fidelity Insurance Company (“IFIC”) issued payment and performance bonds, each with a penal limit of $547,718.50, to the City of Irvine as obligee for a subdivision improvement agreement for the construction of public improvements on an apartment building. Subsequently, Harco National Insurance Company (“Harco”) issued performance and payment bonds, each with a penal limit of $324,770, to the City of Irvine as obligee for a subdivision improvement for the construction of public improvements on a different apartment building.
Eventually, a subcontractor on the IFIC bonded project, informed IFIC the principal was in default and asserted a claim against the IFIC payment bond in the amount of $437,815. The subcontractor subsequently filed suit against the principal and IFIC. Around the same time, the City informed IFIC that the principal was in default under the terms of the bonded subdivision improvement agreement and asserted a claim against the IFIC performance bond in the amount of $547,718.00. That same day, the City also informed Harco that its principal was in default under the terms of the bonded subdivision improvement agreement and asserted a claim against the Harco performance bond in the amount of $324,770.
Later that month, in response to the bond claims, IFIC and Harco’s counsel sent a letter to the various Indemnitors of the bonds demanding that they procure the discharge of IFIC and Harco from the bonds and post collateral within five business days in the amount of $1,095,436.00. The Indemnitors failed and refused to post the cash collateral. Accordingly, IFIC and Harco filed suit. Initially, the Court denied the sureties’ application for a temporary restraining order and the sureties then moved for preliminary injunction to compel the Indemnitors to post collateral security under the terms of the Indemnity Agreements.
The indemnity agreements provided that the Indemnitors:
shall deposit with the Surety on demand an amount of money or other collateral security acceptable to the Surety, as soon as liability exists or is asserted against the Surety, whether or not the Surety shall have made any payment therefor, equivalent to such amount that the Surety, in its sole judgement, shall deem sufficient to protect it from loss.
California Injunction Law
“A preliminary injunction is an extraordinary remedy never awarded as of right.” Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 5, 24 (2008). On an application for a preliminary injunction, the plaintiff has the burden to establish that (1) there is a likelihood of success on the merits, (2) there is a likelihood that plaintiff will suffer irreparable harm if the preliminary relief is not granted, (3) the balance of equities favors the plaintiff, and (4) the injunction is in the public interest. In the Ninth Circuit, the Winter factors may be evaluated on a sliding scale: “serious questions going to the merits, and a balance of hardships that tips sharply toward the plaintiff can support issuance of a preliminary injunction, so long as the plaintiff also shows that there is a likelihood of irreparable injury and that the injunction is in the public interest.” Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1135 (9th Cir. 2011). However, to satisfy the irreparable injury element, plaintiffs must “demonstrate that irreparable injury is likely in the absence of an injunction.” Winter, 555 U.S. at 22.
In this case, because IFIC and Harco were requesting relief that required the indemnitors to take affirmative action, the motion for a preliminary injunction was treated as a motion for a mandatory injunction. Garcia v. Google, Inc., 786 F.3d 733, 740 (9th Cir. 2015). A mandatory injunction “goes well beyond simply maintaining the status quo pendente lite [and] is particularly disfavored.” Stanley v. Univ. of S. Cal., 13 F.3d 1313, 1320 (9th Cir. 1994)). The Ninth Circuit has held that a “district court should deny such relief ‘unless the facts and law clearly favor the moving party.’” Garcia, 786 F.3d at 740. In general, mandatory injunctions “are not granted unless extreme or very serious damage will result and are not issued in doubtful cases or where the injury complained of is capable of compensation in damages.” Anderson v. United States, 612 F.2d 1112, 1115 (9th Cir. 1980)).
A preliminary injunction is “customarily granted on the basis of procedures that are less formal and evidence that is less complete than in a trial on the merits.” Univ. of Texas v. Camenisch, 451 U.S. 390, 395 (1981). Therefore, in ruling on an application for preliminary injunction, the court may consider evidence that would not be admissible at trial. Johnson v. Couturier, 572 F.3d 1067, 1083 (9th Cir. 2009) (“A district court may … consider hearsay in deciding whether to issue a preliminary injunction.”); Etereo Spirits, LLC v. Ling, No. 21-00302, 2021 WL 2497936, at *2 (C.D. Cal. Apr. 22, 2021) (“[T]he Federal Rules of Evidence do not strictly apply to preliminary injunction proceedings.”). The Court may give weight to inadmissible evidence when doing so serves the purpose of preventing irreparable harm before trial. Johnson, 572 F.3d at 1083. This flexibility exists because the urgency of obtaining a preliminary injunction necessitates a prompt determination and makes it difficult for a party to procure supporting evidence in a form that would be admissible at trial. “While district courts may consider inadmissible evidence in the context of a preliminary injunction, this does not mean that evidentiary issues have no relevance to this proceeding. Such issues, however, properly go to weight rather than admissibility.” Am. Hotel & Lodging Ass’n v. City of L.A., 119 F. Supp. 3d 1177, 1185 (C.D. Cal. 2015).
The Court’s Analysis
The court began its analysis by stating that the sureties appear likely to succeed on the merits for their breach of contract and specific performance claims, noting that California courts have found that “indemnity agreements are construed under the same rules which govern the interpretation of other contracts.” City of Bell v. Superior Ct., 220 Cal. App. 4th 236, 247 (2013). The court found that the sureties satisfied the elements of a breach of contract by submitting the indemnity agreements, submitting proof of the issuance of the bonds, submitting proof of the demand for collateral and failure to provide the collateral. The sureties also provided sufficient evidence to conclude that they will likely suffer damages as a result of the Indemnitors’ breach. The court cited the fact that there were at least three claims pending against the bonds issued, which the sureties may have to pay out of their own funds if the collateral is not provided. Moreover, the sureties incurred expenses, including retaining experts, court costs, and attorneys’ fees, that would also be covered by the collateral if properly posted.
The court further found that sureties were also likely to succeed on their specific performance claims. “If a creditor is to have the security position for which he bargained, the promise to maintain the security must be specifically enforced.” Safeco Ins. Co. of Am. v. Schwab, 739 F.2d 431, 433 (9th Cir. 1984). The court stated “[t]hus, ‘sureties are ordinarily entitled to specific performance of collateral security clauses.’ . . . Here, [the sureties] are likely entitled to specific performance because of [the Indemnitors’] failure to fulfill their obligations under the collateral security clauses . . .”
Regarding the factor of likelihood of irreparable harm, the sureties argued that they would not have issued the bonds without the promises and financial guarantees contained within the Indemnity Agreements and absent a preliminary injunction, the sureties would be denied the benefit of their bargain to receive collateral. The sureties continued noting that the purpose of this benefit is to obtain collateral on demand, not at the time of the indemnitors’ choosing. The sureties contended that they would forever lose their right to contractual exoneration if the indemnitors were allowed to avoid posting the requested collateral.
The sureties also point to a pending foreclosure sale of the project sites at issue as evidence that the indemnitors were insolvent and would not be able to properly compensate the sureties in the future. Further, the indemnitors failed to produce complete financial records which indicated a likelihood of insolvency. The court agreed with the sureties and stated that the collateral was “to protect [the sureties] from being placed in the position of a general creditor. Damages available after trial and judgment, even if including costs and interest, are of little use to Plaintiffs when they are responsible for investigating, defending, and potentially paying claims on bonds in the present. Protection against this risk to [the sureties] is exactly what the collateral security clauses were meant to secure. No amount of future damages will provide an adequate remedy to harm resulting from present exposure.” citing Great Am. Ins. Co. v. JMR Constr. Corp., No. 2:15–CV–2226, 2015 WL 8328267, at *3 (D. Nev. Dec. 8, 2015); Int’l Fid. Ins. Co. v. Talbot Constr., Inc., NO. 1:15-CV-3969, 2016 WL 8814367, at *7 (N.D. Ga. Apr. 13, 2016); Ohio Cas. Ins. Co. v. Fratarcangelo, 7 F. Supp. 3d 206, 214 (D. Conn. 2014) (“The rationale behind granting specific performance … when the surety is essentially seeking only money damages, is that the surety has specifically bargained for prejudgment collateralization and ‘a judgment for money damages alone would deprive the surety of “prejudgment relief to which it is contractually entitled.” ’ ” (citations omitted)).
The court continued stating “if [the indemnitors] do not post the required collateral and subsequently become insolvent, [the sureties] will suffer losses the collateral security provisions are designed to avoid.” Consequently, the court held that the sureties demonstrated irreparable injury in the absence of an injunction.
Concluding, the court had no trouble finding that the “balance of hardships” weighed in favor of the sureties and that issuance of an injunction would enforce the sureties’ legal rights in the Indemnity Agreements. Compelling the indemnitors’ compliance with their existing legal obligations does not create hardship. Similarly, the court held that an injunction was in the public interest. “When the reach of an injunction is narrow, limited only to the parties, and has no impact on non-parties, the public interest will be ‘at most a neutral factor in the analysis rather than one that favor[s] [granting or] denying the preliminary injunction.’” Stormans, Inc. v. Selecky, 586 F.3d 1109, 1138–39 (9th Cir. 2009). The court stated “[t]here is a public interest in the enforcement of contracts, ‘especially those between sureties and their indemnitors.’” Ohio Cas. Ins. Co. v. L.H. Eng’g Co., Inc., No.: SACV 13-01249, 2014 WL 12569353, at *2 (C.D. Cal. Jan. 2, 2014). Moreover, “[i]f the courts did not enforce indemnification rights in the context of construction bonds, the public works bonding process would be undermined, impeding the progress of significant and important public works projects.” Emps. Mut. Cas. Co. v. Constr. Servs. Unlimited, No. 2:15-CV-1592, 2016 WL 1317721, at *3 (D. Nev. Apr. 1, 2016). Accordingly, the court entered the preliminary injunction in favor of the sureties and ordered the indemnitors to provide the collateral.
This case provides a good road map to enforcing a collateral demand through a preliminary injunction under California law.
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.