SARAH S. VANCE, District Judge.
Plaintiff Employers Mutual Casualty Company moves for summary judgment on its claims for contractual indemnification in the amount of $10,000 and specific performance of a collateral security provision in the parties' indemnity contract. Plaintiff also moves to separate the issues in this case under Rule 42(b) of the Federal Rules of Civil Procedure and to stay its indemnity claims for future losses and attorneys' fees. Defendants admit that plaintiff is entitled to $10,000 in indemnification but contest plaintiff's entitlement to specific performance and its motion to separate issues and stay proceedings. For the following reasons, the Court grants plaintiff's motions for summary judgment on plaintiff's $10,000 indemnification and specific performance claim. Additionally, the Court concludes that before it can rule on plaintiff's motion to separate issues and stay proceedings, plaintiffs must show cause why its claim for indemnification for future losses should not be dismissed as premature instead of stayed.
This case involves a contractual dispute between a surety company and a construction contractor. Plaintiff, a company that issues payment and performance bonds and stands as a surety for contractors, issued bonds to enable defendants to obtain several construction and renovation contracts. Plaintiff alleges that third parties have now made claims against those bonds and that plaintiff has and may continue to sustain losses as a result. According to plaintiff, an indemnity contract between the parties entitles plaintiff to indemnification for past and future losses, attorneys' fees, costs, and expenses incurred in connection with the bonds. Plaintiff also argues that the contract requires defendant to deposit a reserve of cash or collateral, which plaintiff may use to pay claims and expenses incurred on bonded projects.
On or about June 9, 2009, the parties entered into a General Agreement of Indemnity (the "Indemnity Agreement") in favor of plaintiff.
Section 3 of the Indemnity Agreement confirms plaintiff's broad authority to settle claims upon any bond it executes:
Importantly, the Indemnity Agreement also includes a provision entitled "Right to Demand Reserve," which states:
On November 1, 2010, defendant contracted with the City of New Orleans to serve as a general contractor for repairs of the Municipal Yacht Harbor Administration Building ("the Yacht Harbor Project").
Unfortunately, the Yacht Harbor Project did not go as planned. Defendants allege that the Project was marred at the outset by the City's failure to (1) provide specifications that conformed to local building codes; (2) perform necessary lead paint abatement work; and (3) timely respond to requests for information and change orders.
In May 2013, defendants filed suit against the City in Civil District Court for the Parish of New Orleans for damages due under the Yacht Harbor Project contract.
The parties here have also been sued by one of the subcontractors on the Yacht Harbor Project, Industrial & Mechanical Contractors, Inc. ("Industrial"). On January 23, 2014, Industrial sued plaintiff and defendants, alleging that it was owed $13,331.00 plus interest, attorneys' fees, and lien filing fees as a result of defendants' non-payment.
In light of the current and anticipated litigation concerning the Yacht Harbor Project, plaintiff purported to exercise its rights under the Indemnity Agreement by setting a reserve and demanding that defendants post funds in the amount of $300,000.
Accordingly, the letter stated that plaintiff had set a reserve in the amount of $300,000. Plaintiff demanded that defendants post collateral in the amount of $300,000 within ten days in order to secure plaintiff from anticipated losses and expenses.
Plaintiff filed this lawsuit against defendants, seeking to enforce its rights under the Indemnity Agreement. Count I of plaintiff's complaint alleges that defendants are jointly and severally liable to plaintiff for "all past and future attorneys' fees, expenses, and costs incurred by [plaintiff]" as a result of having executed the Yacht Harbor Bond and two other bonds not relevant here.
Plaintiff now moves for partial summary judgment and seeks (1) indemnification in the amount of $10,000, the amount that plaintiff paid to settle the claim by Industrial; and (2) specific performance of the collateral security provision of the Indemnity Agreement.
Summary judgment is warranted when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994). When assessing whether a dispute as to any material fact exists, the Court considers "all of the evidence in the record but refrains from making credibility determinations or weighing the evidence." Delta & Pine Land Co. v. Nationwide Agribusiness Ins. Co., 530 F.3d 395, 398-399 (5th Cir. 2008). The Court must draw reasonable inferences in favor of the nonmoving party, but "unsupported allegations or affidavits setting forth `ultimate or conclusory facts and conclusions of law' are insufficient to either support or defeat a motion for summary judgment." Galindo v. Precision Am. Corp., 754 F.2d 1212, 1216 (5th Cir. 1985) (quoting 10B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure: Civil § 2738 (2d ed. 1983)).
If the dispositive issue is one on which the moving party will bear the burden of proof at trial, the moving party "must come forward with evidence that would entitle it to a directed verdict if the evidence went uncontroverted at trial." Int'l Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1264-65 (5th Cir. 1991) (quotation marks removed). The nonmoving party can then defeat the motion by either countering with sufficient evidence of its own, or "showing that the moving party's evidence is so sheer that it may not persuade the reasonable fact-finder to return a verdict in favor of the moving party." Id. at 1265.
If the dispositive issue is one on which the nonmoving party will bear the burden of proof at trial, the moving party may satisfy its burden by merely pointing out that the evidence in the record is insufficient with respect to an essential element of the nonmoving party's claim. See Celotex, 477 U.S. at 325. The burden then shifts to the nonmoving party, who must, by submitting or referring to evidence, set out specific facts showing that a genuine issue exists. See id. at 324.
The nonmovant may not rest upon the pleadings but must identify specific facts that establish a genuine issue for trial. Id.; see also Little, 37 F.3d at 1075 ("Rule 56 'mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.'") (quoting Celotex, 477 U.S. at 322).
The parties dispute what law governs their agreement. The Indemnity Agreement contains a choice of law provision, which selects Iowa law for the construction and interpretation of the contract.
Under Iowa law, the construction or legal effect of a contract is a matter of law to be decided by the court. Connie's Const. v. Fireman's Fund Ins., 227 N.W.2d 207, 210 (Iowa 1975). When constructing a written contract, the court is guided by the "`cardinal principle' that the parties' intent controls." Amerus Prop. Brokers v. Hicklin, 585 N.W.2d 245, 247 (Iowa 1998) (quoting Iowa R. Civ. P. 6.904). Absent ambiguity or relevant extrinsic evidence, intent "is determined by what the contract itself says." Id.; see also State v. Starzinger, 179 N.W.2d 761, 764 (Iowa 1970) (concluding that where there is no relevant extrinsic evidence, the court must give effect to the language of the contract according to its commonly accepted and ordinary meaning). Thus, "the court will not resort to rules of construction where intent of the parties is expressed in clear and unambiguous language." Allen v. Highway Equip. Co., 239 N.W.2d 135, 139 (Iowa 1976).
Under the Indemnity Agreement, defendant is required to indemnify plaintiff against "any and all liability for losses and/or expenses of whatsoever kind or nature" which plaintiff sustains "by reason of having executed . . . the Bonds."
Plaintiff alleges, and defendants do not dispute, that Industrial sued both defendants and plaintiff in January 2014, alleging that it was owed $13,331.00, plus interest, attorneys' fees, and lien filing fees as a result of defendants' non-payment.
The Court finds that plaintiff is entitled to indemnification in the amount of $10,000 actually paid by plaintiff to settle Industrial's claim for work performed on the Yacht Harbor project, as requested in Count I of plaintiff's complaint. The Court will enter partial summary judgment in favor of plaintiff.
Section 11 of the Indemnity Agreement states that plaintiff has "sole discretion" to set a reserve of "any amount" that it deems necessary to cover any loss or expense fee sustained by plaintiff in the performance of the bonds.
Id. Here, plaintiff set a reserve in the amount of $300,000 and demanded defendant post collateral equal to the reserve within ten days.
Defendants do not argue that the contract is ambiguous. Nor do they deny that (1) they executed the Indemnity Agreement; (2) plaintiff's June 3, 2013 letter set a reserve and made a demand for collateral in the amount of $300,000; or that (3) defendants have refused to deposit cash or collateral with plaintiff.
Nonetheless, defendants argue that plaintiff is not entitled to collateral security because plaintiff has not shown a factual basis for the amount of its reserve.
The parties do not cite, and the Court has not found, any Iowa cases addressing the enforcement of a collateral security provision in an indemnity agreement. But numerous courts in other states have held that such provisions require an indemnitor to post collateral security in the amount of the surety's reserve.
Defendants' contention that plaintiff must nonetheless prove the extent of liability that it realistically faces finds little support in the case law. Defendants cite just one case from an intermediate appellate court in Florida. In Transamerica Premium Insurance Co. v. Cavalry Construction Inc., a surety company executed a bond in favor of a construction contractor. Under the parties' indemnity agreement, the contractor was required, upon demand by the surety, to deposit "cash or other property . . . as collateral security, in sufficient amount to protect the Surety" against claims or potential claims on its bond. The surety set a reserve and demanded collateral, but the Fifth District Court of Appeal of Florida held that the surety was not entitled to collateral security because it had failed to "flesh out the nature and approximate amount of the claims and liabilities it might reasonably anticipate under the bond." 52 So.2d 225, 226 (Fla. Dist. Ct. App. 1989). The court reasoned that "the party seeking quia timet relief must clearly establish a basis for it." Id. The court did not elaborate; nor did it cite any authority for its legal conclusion or address the great weight of cases holding that a surety's right to collateralization should be enforced as written, without any implied duty to "flesh out" the surety's reserve calculation. Additionally, the collateral security provision in Transamerica was phrased differently than the provision in this case. Here, the Indemnity Agreement states that plaintiff has "sole discretion" to set a reserve in "any amount." In Transamerica, the contract required the indemnitor to deposit collateral "in sufficient amount to protect the Surety with respect to such claim or potential claim. . . ." Id. (emphasis added). To the extent that the court in Transamerica intended its holding to effectuate the requirement that the demand be merely "sufficient" to address claims against the surety, its reasoning does not apply to the broader collateral security provision here. Thus, this single case from Florida does not convince the Court that Iowa law requires plaintiff to make any particular showing before exercising its contractual right to demand collateral security.
Here, defendants admit that plaintiffs set a reserve of $300,000 and demanded collateral security.
By its motion for partial summary judgment, plaintiff seeks specific performance of the Indemnity Agreement in the form of an order compelling defendants to post collateral in the amount of plaintiff's reserve. Because Iowa law governs the Indemnity Agreement between the parties, the Court looks to Iowa law to determine plaintiff's entitlement to specific performance. See Horner v. Bourland, 724 F.2d 1142, 1144-45 (5th Cir. 1984) (reviewing district court's refusal to specifically enforce real estate contract under the law of the forum state); Rodriguez v. VIA Metro. Transit Sys., 802 F.2d 126, 132 (5th Cir. 1986) ("The district court, on remand, should be guided by the usual criteria that govern a decree of specific performance in Texas."). Under Iowa law, "specific performance is a matter of equity rather than a strict right and rests in the sound discretion of the court." Pazawich v. Johnson, 39 N.W.2d 590, 592 (1949). A court will not award specific performance "unless the terms of the contract are so expressed that the court can determine with reasonable certainty what is the duty of each party and the conditions under which performance is due." Id. (holding that an instrument that purported to convey real property could not be specifically enforced as it lacked many essential details of the parties' agreement). Additionally, specific performance will not be granted when the party claiming breach of contract has an adequate remedy at law. Severson v. Elberon Elevator, Inc., 250 N.W.2d 417, 423 (Iowa 1977).
Here, the terms of the parties' contract are clear. The collateral security arrangement is spelled out in great detail in Section 11 of the Indemnity Agreement. This provision plainly states that plaintiff has the contractual right to set a reserve in "any amount," and upon receiving a written demand, defendants are obligated to deposit security in the amount of plaintiff's reserve.
The primary issue, then, is whether plaintiff has an adequate remedy at law for defendants' failure to post collateral security. Plaintiff argues that its legal remedies are inadequate because a claim for money damages would deprive plaintiff of its prejudgment right to collateralization.
The Court recognizes that there is a contrary minority position. Some courts have refused to specifically enforce collateral security provisions absent a specific showing by the surety as to why the surety's remedies at law are inadequate. See e.g., Safeco Ins. Co. of Am. v. Mountaineer Grading Co., 2012 WL 830158, at * 10 (S.D.W.Va. March 9, 2012) (holding that a surety failed to demonstrate an entitlement to specific performance when it asserted only that indemnitors failed to provide collateral security upon demand and did not offer any evidence demonstrating why its legal remedies were inadequate). These cases do not give sufficient weight to the nature of the surety's right to right to collateral security. As the majority position recognizes, a surety's claim for collateralization is not just an issue of monetary loss, which can be remedied by monetary damages; rather, it is an issue of protecting the surety's expectations under the indemnity contract. See Travelers v. Ockerlund, 2004 WL 1794915, at *6. A surety who holds a contractual right to demand collateral security has specifically bargained for a contractual right to prejudgment relief. So if the surety is "to have the security position for which he bargained, the promise to maintain the security must be specifically enforced." Safeco, 807 F. Supp. 2d at 827; see also Ohio Cas. Ins. Co. v. Fratarcangelo, 7 F.Supp.3d 206, 214 (D. Conn. 2014) (concluding that because a surety had bargained for prejudgment collateralization, a judgment for money damages alone would deprive the surety of prejudgment relief to which it is contractually entitled).
Plaintiff in this case bargained for the right to demand and receive funds, which it could use to pay losses that it anticipated incurring on the Yacht Harbor Bond. That bargain will be frustrated if plaintiff is required to "suffer any loss, even if only temporary, associated with the performance of the primary obligor's duty." Travelers v. Ockerlund, 2004 WL 1794915, at *4. Thus, the Court finds that plaintiff's legal remedies are inadequate. While plaintiff may be entitled to money damages in this matter, an award of damages after trial does not adequately vindicate the plaintiff's right to collateralization. See Ohio, 7 F. Supp. 3d at 214 (noting that surety's true injury the loss of its bargained-for and contractually-guaranteed position as a secured creditor," a loss that cannot be rectified post judgment). Plaintiff is therefore entitled to the injunctive relief its seeks.
Defendants resist this conclusion by arguing that plaintiffs have not made the showings required for a preliminary injunction. Defendants cite a Florida district court case for the proposition that "a party seeking entry of a preliminary injunction must establish (1) a substantial likelihood of success on the merits, (2) a substantial threat of irreparable injury if the injunction is not granted, (3) the threatened injury to the moving party outweighs whatever damage the proposed injunction may cause the opposing party, and (4) if issued, the injunction would not be adverse to the public interest." Developers Sur. & Indem. Co. v. Hansel Innovations, Inc., No. 8:14-CV-425-T-23TBM, 2014 WL 2968138, at *4 (M.D. Fla. July 1, 2014). Defendants misconstrue the nature of plaintiff's motion. Plaintiff does not seek a preliminary injunction but, rather, specific performance of its right to collateral security. As discussed in Section III.B.1 above, a party's entitlement to specific performance is governed by state law, not the federal standards for granting injunctive relief under Rule 65 of the Federal Rules of Civil Procedure. See e.g., Horner, 724 F.2d at 1144-45. Thus, courts in this circuit and others have repeatedly granted specific enforcement of collateral security provisions, as long as specific performance is available under state law.
Defendants claim that other facts are relevant to plaintiff's specific performance claim. Specifically, defendants describe the Yacht Harbor Project in great detail. According to defendants, poor planning and delays caused by the City of New Orleans marred the Project from the beginning.
While defendants' allegations are certainly relevant in the State Litigation between the parties here and the City of New Orleans, they are irrelevant to plaintiff's claim for collateral security. Whether the City eventually recovers from plaintiff in the State Litigation is not determinative of plaintiff's right to specific performance of its right to collateralization. Under the Indemnity Agreement, plaintiff has "sole discretion" to determine whether a reserve is necessary and to demand a deposit of cash or collateral in the amount of that reserve.
Defendants also suggest that plaintiff's demand is improper because plaintiff itself has contested the City's claims against the bond in the State Litigation. But this argument too is clearly without merit. Plaintiff has a right to defend itself in litigation, and plaintiff does not forfeit its rights under the Indemnity Agreement by contesting the validity of claims against its bond. See Travelers Cas. & Sur. Co. of Am. v. W.P. Rowland Constructors Corp., 2013 WL 2285204, at *4 (D. Ariz. May 22, 2013) (concluding that "a defense of litigation under a full reservation of rights" does not affect surety's contractual right to specific performance of a collateral security provision).
Finally, the Court is not persuaded by defendants' suggestion that the amount of plaintiff's reserve is too high compared to its realistic risk of loss. Under the Yacht Harbor Bond, plaintiff bound itself as surety in the sum of $754,000.
The Court finds, based on uncontested facts, that plaintiff is entitled to specific performance as requested in Count II of its complaint. The Court will enter partial summary judgment in favor of plaintiff.
Having addressed plaintiff's motion for partial summary judgment, the Court turns to plaintiff's motion to separate the trial and stay certain proceedings. Plaintiff asks the Court to separate trial on the issues of liability, losses already incurred, and collateral security from trial on the issue of future losses and attorneys' fees.
Before the Court can determine the propriety of the stay, a threshold issue must be addressed. The Court notes that under Iowa law an action for indemnity does not accrue until "the indemnitee's legal liability becomes fixed or certain as in the entry of a judgment or a settlement." Evjen v. Brooks, 372 N.W.2d 494, 496 (Iowa 1985) (citing Vermeer v. Sneller, 190 N.W.2d 389, 392 (Iowa 1971). Thus, a party cannot enforce its rights under an agreement to indemnify until or unless it suffers some "actual loss or damage." Becker v. Cent. States Health & Life Co. of Omaha, 431 N.W.2d 354, 357 (Iowa 1988) overruled on other grounds by Johnston Equip. Corp. of Iowa v. Indus. Indem., 489 N.W.2d 13 (Iowa 1992); see also Kaydon Acquisition Corp. v. Custum Mfg., Inc., 301 F.Supp.2d 945, 960 (N.D. Iowa) (interpreting the "actual loss" requirement to mean not simply the accrual of liabilities but the actual payment of a claim for which the payor is entitled to indemnification from another). In light of these principles, the Court questions the viability of plaintiff's stated claim for indemnification for "future attorneys' fees, expenses, and costs incurred."
For the foregoing reasons, the Court GRANTS plaintiff's motion for partial summary judgment on its claims for: (1) contractual indemnification in the amount of $10,000.00, the amount that plaintiff paid to settle the claim by Industrial; and (2) specific performance of the collateral security provision of the Indemnity Agreement. The Court ORDERS defendants to deposit with plaintiff cash or collateral in the amount of the reserve established by plaintiff's, $300,000.00, within ten days from the date of this order.
The Court further ORDERS plaintiff to show cause by September 10, 2015 why its claim for indemnification for future losses and expenses should not be dismissed as premature under Iowa law, rather than stayed. Defendants may respond by September 15, 2015.
