BARRY W. ASHE, District Judge.
Before the Court is a motion for preliminary injunction filed on behalf of Travelers Casualty & Surety Company of America ("Travelers") against Clayton Fucich, Kathleen Fucich, and Fucich Contracting, Inc. ("FCI") (collectively "Indemnitors") to enforce its right to collateral under an indemnity agreement.
On or about December 22, 2016, FCI entered into a construction contract with the St. Bernard Parish Government ("Parish") to be the general contractor for the public works improvement project known as the Lake Borgne Basin Levee District Pump Station #1 and #4 Pump Upgrade ("Project").
The Indemnity Agreement also provides Travelers the right to indemnification from "Loss":
The Indemnity Agreement defines "Loss" as:
Furthermore, in the event of a default of the Indemnity Agreement, which includes "a declaration of Contract default by any Obligee," and "[Travelers'] good faith establishment of a reserve," Travelers may invoke certain specified "Remedies" against the Indemnitors.
On October 26, 2017, FCI alleges its crew discovered a design defect in the engines supplied for the Project that made them incompatible with the gears.
All parties have engaged in settlement negotiations, but FCI has refused to participate on some occasions.
Travelers seeks a preliminary injunction to enforce the collateral security provision of the Indemnity Agreement against the Indemnitors.
In opposition,
A movant seeking a preliminary injunction must establish (1) a substantial likelihood that the it will prevail on the merits; (2) a substantial threat the movant will suffer irreparable injury if the injunction is not granted; (3) that the threatened injury to the movant if the injunction is denied outweighs the potential harm to the non-movant if the injunction is granted; and (4) that granting the injunction will not disserve the public interest. Garcia v. Jones, 910 F.3d 188, 190 (5th Cir. 2018). "A preliminary injunction is an extraordinary remedy which courts grant only if the movant has clearly carried the burden as to all four elements." Guy Carpenter & Co. v. Provenzale, 334 F.3d 459, 464 (5th Cir. 2003). A preliminary injunction "may only be awarded upon a clear showing that the [movant] is entitled to such relief," Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 24 (2008), and is never awarded as a matter of right but only within the sound discretion of the district court. Munaf v. Geren, 553 U.S. 674, 689-90 (2008) (citation omitted); Miss. Power & Light Co. v. United Gas Pipe Line Co., 760 F.2d 618, 621 (5th Cir. 1985). "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." University of Tex. v. Camensich, 451 U.S. 390, 395 (1981); see Atwood Turnkey Drilling, Inc. v. Petroleo Brasilerio, S.A., 875 F.2d 1174, 1178 (5th Cir. 1989). Ultimately, granting a preliminary injunction "is the exception rather than the rule." Miss. Power & Light Co., 760 F.2d at 621.
Generally, a federal court does not render a final judgment on the merits at the preliminary injunction stage; and when it does not render a final judgment, its findings of fact and conclusions of law are not binding at a trial on the merits. Camensich, 451 U.S. at 395. Additionally, "at the preliminary injunction stage, the procedures in the district court are less formal, and the district court may rely on otherwise inadmissible evidence, including hearsay evidence. Thus, the district court can accept evidence in the form of deposition transcripts and affidavits." Sierra Club, Lone Star Chapter v. F.D.I.C., 992 F.2d 545, 551 (5th Cir. 1993).
"To show a likelihood of success, the plaintiff must present a prima facie case, but need not prove that he is entitled to summary judgment." Daniels Health Scis., L.L.C. v. Vascular Health Scis., L.L.C., 710 F.3d 579, 582 (5th Cir. 2013). A preliminary injunction should not issue if "the law on the question at the heart of the dispute does not favor [the movant's] position." La Union Del Pueblo Entero v. Fed. Emergency Mgmt. Agency, 608 F.3d 217, 225 (5th Cir. 2010).
The parties dispute what state law applies in this diversity, breach-of-contract case.
The parties' claims arise under the Indemnity Agreement and the Bond. Louisiana's general choice-of-law rule applicable to conventional obligations provides:
La. Civ. Code art. 3537. Article 3515, the general choice-of-law rule for all cases, provides:
However, when a contract specifies the applicable law, the contract is "governed by the law expressly chosen or clearly relied upon by the parties, except to the extent that law contravenes the public policy of the state whose law would otherwise be applicable under Article 3537." La. Civ. Code art. 3540. The parties may choose the law of any state, regardless of whether "that state has a particular factual, geographical, or legal relationship with the contract" subject to the limitation that the chosen law must not contravene "the public policy of the state whose law would have been applicable to the issue `but for' the parties' choice." Id. at revision cmt. f.
Here, neither the Indemnity Agreement nor the Bond contains an express choice-of-law provision or signals clear reliance on a particular state's law as contemplated by Civil Code article 3540. Therefore, the Court conducts the impairment analysis described in articles 3537 and 3515.
Travelers is a corporation organized under the laws of Connecticut with its principal place of business in Connecticut. FCI is a corporation organized under the laws of Mississippi with its principal place of business in Mississippi. FCI is licensed to do business in both Mississippi and Louisiana. Clayton and Kathleen Fucich are Mississippi citizens.
Notwithstanding the Mississippi contacts, Louisiana's interest in enforcing contracts governed by the Louisiana Public Works Act for a public construction in Louisiana outweighs Mississippi's interest in this case. Louisiana citizens of the Parish have a strong interest in the enforcement of both bonds and indemnity agreements that secure the performance of public construction projects in their region, such as the replacement of engines and gear reducers on storm water drainage pumps designed to protect the Parish and its citizens against flooding. Louisiana's law and policies aimed toward ensuring the financial integrity and completion of public works projects would be most impaired if its law were not applied in construing and enforcing the Bond and Indemnity Agreement securing performance of the contract between FCI and the Parish for the Project. Therefore, the Court applies Louisiana law.
Under Louisiana law, the general rules of contract interpretation apply to indemnity agreements. Sovereign Ins. Co. v. Tex. Pipe Line Co., 488 So.2d 982, 985 (La. 1986). A contract is the law between the parties, and the court must give the contract its legal effect according to the parties' common intent. Sanders v. Ashland Oil, Inc., 696 So.2d 1031, 1036 (La. App. 1997). This intent is to be determined by the words of the contract when they are "clear and explicit and lead to no absurd consequences." La. Civ. Code arts. 2045, 2046; Sanders, 696 So. 2d at 1036. "The rules of interpretation establish that, when a clause in a contract is clear and unambiguous, the letter of that clause should not be disregarded under the pretext of pursuing its spirit." Sanders, 696 So. 2d at 1036 (citing La. Civ. Code art. 2046 cmt. b; Cashio v. Shoriak, 481 So.2d 1013, 1015 (La. 1986)) (other citations omitted). "Each provision ... must be interpreted in light of the other provisions so that each is given the meaning suggested by the contract as a whole." La. Civ. Code art. 2050. "A doubtful provision must be interpreted in light of the nature of the contract, equity, usages, the conduct of the parties before and after the formation of the contract, and of other contracts of a like nature between the same parties." Id. art. 2053. "Usage, as intended in the preceding articles, is a practice regularly observed in affairs of a nature identical or similar to the object of a contract subject to interpretation." Id. art. 2055.
The collateral security provision of the Indemnity Agreement is unambiguous, and the parties do not contend otherwise. Nor do the parties dispute that FCI has an obligation to indemnify Travelers for loss incurred with respect to Travelers' defense of the Parish's claim under the Bond, which is clearly and unambiguously set forth in Section 3.
Section 5 provides in part: "Indemnitors agree to deposit with [Travelers], upon demand, an amount as determined by [Travelers] sufficient to discharge any Loss or anticipated Loss."
The court in Travelers Casualty & Surety Company of America v. Padron, 2017 WL 9360906, at *8 (W.D. Tex. Aug. 2, 2017), analyzed an identical collateral security provision. There, Travelers sought a preliminary injunction to force the indemnitors under an indemnity agreement that secured performance and payment bonds to deposit collateral security for recoverable and incurred losses of $6.6 million and roughly $12.7 million of anticipated loss in relation to bond claims. Id. at *1-3, *5. The court reasoned that Travelers satisfied the likelihoodof-success-on-the-merits prong of the preliminary injunction analysis because "(1) such a provision is intended to secure collateral prior to loss and to avoid loss, even if only temporarily, and (2) specific performance is the only available remedy." Id. at *8. The Court agrees with this rationale.
Travelers' inartful November 12, 2018 demand letter to FCI may have caused FCI to believe wrongly that a default was necessary before Travelers could demand collateral. But the Indemnity Agreement does not impose such a prerequisite. Instead, Travelers' recourse under the collateral security provision is distinct from the "Remedies" (Section 6 of the Indemnity Agreement) that Travelers may only invoke "[i]n the event of a Default."
FCI also claims that the collateral security provision is unenforceable because Travelers breached its obligations under the Bond and the Indemnity Agreement in bad faith. Specifically, FCI contends that Travelers' demand was made in bad faith because: (1) Travelers denied the Parish's claim under the Bond after having itself concluded that FCI is not at fault, rendering its $5 million demand for collateral an unreasonable estimate of loss presumably chosen only to force FCI to settle; (2) Travelers admitted it has not yet established a reserve; and (3) Travelers acted in bad faith by communicating to the Parish about FCI's nonperformance.
The Indemnity Agreement permits demand of "an amount as determined by [Travelers] sufficient to discharge any Loss or anticipated Loss." While Travelers may plainly exercise discretion to determine the amount, its discretion is limited to the determination of an amount "sufficient to discharge any Loss or anticipated Loss." "Sufficient" means "of a quantity, extent, or scope adequate to a certain purpose or object," or "to provide the needs or accommodation of, to satisfy." THE OXFORD ENGLISH DICTIONARY (2019). A sufficient amount would therefore be one to accommodate the scope of Travelers' loss and anticipated loss — the monies it expects to expend to complete the Project as well as the attorney's fees and damages it has incurred or may incur in response to the Parish's claim under the Bond. Although the word "sufficient" is not the same as "reasonable," the use of the adjective "sufficient" in this context implies a similar limitation, where the amount is reasonably related to Travelers' loss or anticipated loss. Cf. Cincinnati Ins. Co. v. Savarino Constr. Corp., 2011 WL 1068022, at *7-13 (E.D. La. Mar. 21, 2011) (surety's reasonableness is relevant when indemnity provision covered payments made by surety "in the reasonable belief that it was liable for the amount disbursed, or that such payment or compromise was reasonable under all the circumstances").
Here, Travelers demanded $5,036,878.49, representing the damages the Parish seeks to recover against it and its attorney's fees and costs incurred as of December 27, 2018, the date of its application for preliminary injunction.
Rather than addressing whether the amount of Travelers' demand was "sufficient to discharge [the] Loss or anticipated Loss" Travelers faced as a result of the Parish's suit, FCI asserts that Travelers' demand was made in bad faith. FCI relies on cases holding that a surety has an implied duty to demand an amount of collateral in good faith — meaning that the amount demanded is substantiated by existing claims. See Safeco Ins. Co. of Am. v. M.E.S., Inc., 2010 WL 4828103 (E.D.N.Y. Nov. 22, 2010) (establishing amount of reasonable collateral security); BIB Constr. Co., Inc. v. Fireman's Ins. Co., 625 N.Y.S.2d 550, 523 (1995) ("[s]o long as the sum demanded is reasonable," indemnitor obliged to deposit amount set at the "sole discretion" of the surety). FCI contends that $5 million is unreasonable because Travelers has admitted that FCI is not at fault.
But the reasonableness of an amount of collateral does not depend upon FCI's actual liability. As stated by the court in Safeco Insurance Company of America v. M.E.S., Inc.:
2010 WL 4828103, at *4. There, the court concluded that expenses the surety might not ultimately have to bear were reasonably included as anticipated loss because the surety faced the risk it may be liable for them. The indemnitors would be entitled to repayment if the damages were actually less than the posted security. Id. at *9. The same reasoning applies here. FCI's actual liability, which remains in dispute, will ultimately be resolved at trial or in settlement, whereupon FCI would be entitled to reimbursement of any posted security above the amount of settlement or damages awarded.
Moreover, the Indemnitors' contention that Travelers' demand was made in bad faith as a tactic to force FCI to settle is unavailing in light of the Indemnity Agreement's settlement provision, which purports to provide Travelers the right, at its sole discretion, to settle any claims made in relation to the Bond.
Much time has passed since Travelers made its $5 million collateral security demand in November 2018 and since the Court heard evidence related to it in January 2019. In the interim, the parties came to a preliminary agreement on some points in dispute that may have altered the analysis of what amount might now be "sufficient to discharge any Loss or anticipated Loss." Thus, the Court must determine what amount would
FCI next contends that Travelers cannot demand collateral without first having established a good-faith reserve. However, the Indemnity Agreement does not contain any language predicating the collateral demand upon the establishment of a reserve. Nor are any of the terms in Section 5, such as the term "Loss," defined in relation to a reserve. Therefore, Travelers' stipulation to forgo setting a reserve is inconsequential to its demand for collateral.
Finally, the Court addresses FCI's contention that Travelers acted in bad faith by communicating to the Parish about FCI's failure to perform under its contract with the Parish concerning the Project. The Louisiana Procurement Code imposes a duty of good faith in the performance and enforcement of public works contracts, such as the contract for replacement of the engines and gears on the Parish's pumps. See La. R.S. 39:1551 et seq. Courts have applied this duty of good faith to bonds and related indemnity agreements securing public works contracts. See, e.g., Liberty Mut. Ins. Co. v. Integrated Pro Servs., LLC, 2015 WL 3620147, at *3 (E.D. La. June 9, 2015). "`Good faith' means honesty in fact in the conduct or transaction concerned and the observance of reasonable commercial standards of fair dealing." Id. (quoting La. R.S. 39:1553(B)).
FCI relies on Liberty Mutual Insurance Co. v. Integrated Pro Services, LLC, in which the court applied the statute's good-faith standard to a surety's bad-faith conduct, to assert that Travelers acted in bad faith as did the surety there. But the conduct at issue in Liberty Mutual is distinguishable. Counsel for the surety in Liberty Mutual had not informed the indemnitors of its communication with the principal at the time of the communication. Id. at *3-4. In contrast, here, Travelers immediately informed the Indemnitors of the email the Parish sent to Travelers.
In sum, Travelers has demonstrated a substantial likelihood of success on the merits of its collateral demand under the Indemnity Agreement. As reviewed above, the law and facts favor Travelers' reading and application of the collateral security provision, and none of FCI's objections to enforcing the provision at this juncture has merit.
To prevail on the second element of a preliminary injunction, the movant must show that the threat of injury is likely and irreparable. See Winter, 555 U.S. at 22. An injury is irreparable if it cannot be adequately compensated by money damages. Dennis Melancon, Inc. v. City of New Orleans, 703 F.3d 262, 279 (5th Cir. 2012). Thus, "only those injuries that cannot be redressed by the application of a judicial remedy after a hearing on the merits can properly justify a preliminary injunction." Canal Auth. of Fla. v. Callaway, 489 F.2d 567, 573 (5th Cir. 1974). Equitable relief is warranted when the injury constitutes "either continuing harm or a real and immediate threat of repeated injury in the future." Soc'y of Separationists, Inc. v. Herman, 959 F.2d 1283, 1285 (5th Cir. 1992).
Travelers emphasizes that the contract language stipulates that Travelers will suffer irreparable injury in the event collateral is not paid and that courts routinely enforce specific performance of the right to collateral because of its nature as pre-judgment security.
Indeed, the Indemnitors stipulated in the Indemnity Agreement that Travelers would suffer irreparable harm if the demand for collateral is not met. In particular, the collateral security provision states: "Indemnitors agree that [Travelers] would suffer irreparable damage and would not have an adequate remedy at law if Indemnitors fail to comply with the provisions of this paragraph."
Without relying on the contractual stipulation of irreparable harm, for a surety to demonstrate irreparable harm in relation to a demand for collateral security, the surety must show that an inability to collect amounts that may become owed by an indemnitor is imminent, including, for example, showing that an indemnitor faces dire financial straits or bankruptcy, thereby increasing the likelihood that damages may not be recovered upon a later judgment awarding specific performance. Padron, 2017 WL 9360906, at *4-5, *8-10; see also W. Sur. Co. v. PASI of La., Inc., 334 F.Supp.3d 764, 796 (M.D. La. Sept. 25, 2018) (imminence of harm may be demonstrated by showing indemnitor to be "insolvent or secreting assets," "in dire financial straits, no longer [having] a traditional source of credit, [having] been dishonest or `is millions of dollars in the hole with various creditors'") (quoting Allied World Specialty Ins. Co. v. Abat Lerew Constr., LLC, 2017 WL 1476131, at *5 (D. Neb. Apr. 24, 2017)). When this showing is made, injunctive relief protects "three interests of the surety: the bargained-for benefit of collateral security, avoidance of present exposure to liability during pending litigation against indemnitors, and avoidance of risk that, should [i]ndemnitors become insolvent, the surety will be left as a general unsecured creditor, frustrating the purpose of the indemnity agreement." Padron, 2017 WL 9360906, at *10 (quoting Int'l Fidelity Ins. Co., 2016 WL 8814367, at *7).
For instance, in Padron, Travelers sought an injunction to enforce a collateral security provision identical to the one at issue here. Id. at *2, *3-6. While the court concluded that Travelers "undisputedly `bargained for a collateral security clause to protect it from impending risks of liability once a claim has been made on the bond[s],'" the court had refused two prior motions for preliminary injunctions on the basis that insufficient evidence existed to prove that Travelers would suffer irreparable harm. Id. at *8, *10 (quoting Safeco Ins. Co. of Am. v. Lake Asphalt Paving & Constr., LLC, 807 F.Supp.2d 820, 827 (E.D. Mo. 2011)). The court refused to grant a preliminary injunction even when Travelers had "created a serious question [as to] whether [the indemnitors] are capable of fulfilling their obligations under the [i]ndemnity [a]greement." Id. at *8. At the evidentiary hearing in support of Travelers' third motion, Travelers presented evidence of the depreciation of the indemnitors' net worth, of several indemnitors' insolvency or near insolvency, that indemnitors were depleting their assets, that the divorces of some indemnitors tied up some assets, and of significant reductions in the indemnitors' available assets. Id. at *11. The court finally awarded the preliminary injunction, concluding that "Travelers has shown that [the indemnitors'] financial situation is a presently existing actual threat to [the indemnitors'] ability to fulfill their obligations under the [i]ndemnity [a]greement, further compounding the irreparable harm to Travelers if it does not receive injunctive relief by way of specific enforcement of the collateral security provision." Id. at *10 (emphasis in original).
Here, Travelers presented evidence at the preliminary injunction hearing that the Indemnitors would be bankrupted if they had to pay the amount demanded by the Parish to complete the Project. FCI submitted a financial statement showing its positive net worth of about $859,000 as of November 16, 2018, and a personal financial statement of Clayton Fucich showing a net worth of approximately $3 million as of February 8, 2018. Clayton Fucich testified that he would be unable to meet his other financial obligations if he were forced to comply with the collateral demand.
Under the third element for a preliminary injunction, "courts `must balance the competing claims of injury and must consider the effect on each party of the granting or withholding of the requested relief.'" Winter, 555 U.S. at 24 (quoting Amoco Prod. Co. v. Village of Gambell, Alaska, 480 U.S. 531, 542 (1987)). "The third factor requires the plaintiff to establish that his irreparable harm is greater than the hardship that the preliminary injunction would cause the defendant." DS Waters of Am., Inc. v. Princess Abita Water, LLC, 539 F.Supp.2d 853, 863 (E.D. La. 2008) (citing Valley v. Rapides Par. Sch. Bd., 118 F.3d 1047, 1051 (5th Cir. 1997)).
In the absence of an injunction, Travelers would be forced to face liability for the full sum of the penal bond as claimed by the Parish without the benefit of its bargained-for right to collateralization under the Indemnity Agreement. On the other hand, the Indemnitors will merely be forced to perform an obligation they agreed to perform under the Indemnity Agreement. See, e.g., Padron, 2017 WL 9360906, at *12 (balance of hardships weighed in favor of surety); Hartford Fire Ins. Co. v. 4-H Ventures, Inc. 2008 WL 11389579, at *4 (enforcing collateral security provision because harm to surety in not protecting its bargain outweighed harm to indemnitors in having to make deposit they expressly agreed to make); Int'l Fidelity Ins. Co. v. Anchor Envtl., Inc., 2008 WL 1931004, at *7 (E.D. Pa. May 1, 2008) ("Defendants are not unfairly prejudiced by being held to the Agreement of Indemnity to which they were signatories."); Great Am. Ins. Co. v. Conart, Inc., 2006 WL 839197, at *6 (M.D. Ga. Mar. 29, 2006) (surety's defense of principal's bonded claims in absence of injunction weighed in favor of surety); Travelers Cas. & Sur. Co. v. Ockerlund, 2004 WL 1794915, at *5 (N.D. Ill. Aug. 6, 2004) (breach of contract in absence of injunction weighed in favor of surety, noting that any funds not used to pay claims on bonds will be returned to indemnitors). Travelers has demonstrated that the hardship it will face if an injunction does not issue outweighs the threatened harm to Indemnitors posed by the injunction.
Finally, the fourth element one seeking a preliminary injunction must establish is that granting the injunction will not disserve the public interest. Miss. Power & Light Co., 760 F.2d at 621. When considering the public interest in a contract made between two private parties, a court is not constrained to the immediate interests of the parties to the contract but considers the situation of the public as it would be affected by injunctive relief. Id. at 625-26.
The Indemnitors contend that forcing them to deposit collateral with Travelers would disserve the public, which has an interest in seeing justice served, because it essentially preempts a decision on the merits of FCI's dispute with the Parish and its engineers and permits Travelers' financial leverage to control the outcome of the litigation.
Travelers says that the public has an interest in enforcing valid contracts, particularly where public construction projects require special bonds providing assurances of indemnity. Travelers broadly asserts that "[t]he indemnity agreement literally represents the foundation of modern suretyship, and its enforcement is essential to the procurement of contract surety bonds to guarantee performance on construction projects," and that failure to enforce the Indemnity Agreement would "undermine the entire surety industry."
In less sweeping terms, the Court concludes that granting Travelers' injunction will not disserve the public interest. Indeed, the public has an interest in courts upholding clearly written contracts, and the surety industry has an interest in the enforcement of collateral security provisions. More importantly, though, the construction project that the Indemnity Agreement and Bond secure provides the vital public service of flood protection. See Int'l Fidelity Ins. Co., 2008 WL 1931004, at *7 (enforcing indemnity agreement to uphold integrity of surety industry and local government in public works construction projects). One of the principal purposes of the surety arrangement is to ensure that public works projects are completed as envisioned for the public's benefit. The public's interest in flood protection in this region is undeniable. Thus, the public interest would not be disserved in granting Travelers' injunction; in fact, the public stands to benefit. Accordingly, for the foregoing reasons,
IT IS ORDERED that Travelers' application for preliminary injunction (R. Doc. 140) is GRANTED in part. However, the Court reserves decision on the amount of collateral sufficient to discharge Travelers' loss or anticipated loss, so no preliminary injunction will issue until the amount of collateral the Indemnitors are to provide is determined.
IT IS FURTHER ORDERED that Travelers shall file a memorandum, which is to address the amount of collateral sufficient to discharge its loss or anticipated loss, no later than Wednesday, May 1, 2019, and that the Indemnitors shall file a memorandum in response no later than Wednesday, May 15, 2019. The Court shall hear argument on this issue on Friday, May 17, 2019, at 9:00 a.m.
IT IS FURTHER ORDERED that FCI's motion for preliminary injunction (R. Doc. 119) and the Indemnitors' application for a preliminary injunction (R. Doc. 157) are DENIED insofar as they seek to enjoin Travelers from exercising its right to demand collateral under the Indemnity Agreement.
IT IS FURTHER ORDERED that the Indemnitors' motion to expedite hearing on their application for preliminary injunction (R. Doc. 159), having been effectively granted by the Court in holding the January 9, 2019 hearing, is DENIED as moot.
