Federal Court in Nebraska Denies Surety’s Request for Preliminary Injunction Requiring Principal to Post Collateral Security, Finding No Irreparable Harm Absent Proof That Principal Was Insolvent or Secreting Assets

Allied World Specialty Ins. Co. v. Abat Lerew Constr., 2017 U.S. Dist. LEXIS 61794 (D. Neb. Apr. 24, 2017)

 Abat Lerew Construction (“ALC”) entered into multiple construction projects which required it to obtain surety bonds guaranteeing its performance. ALC obtained the bonds from Allied World Specialty Insurance Company (“Allied”) and also entered into an indemnity agreement with Allied.  In that agreement ALC agreed to indemnify and hold Allied harmless from and against all liability and to deposit with Allied collateral in an amount determined by Allied to be sufficient to cover liability for any claims under the bonds.

During ALC’s performance of the bonded contracts, Allied received claims on the bonds in excess of $300,000. Invoking the terms of its indemnity agreement with ALC, Allied demanded that ALC post collateral security in the amount of $400,000 to cover liability for the claims.  ALC refused and Allied commenced an action seeking equitable relief requiring ALC to deposit the demanded collateral security.  Upon commencement of the litigation, Allied asked the court to issue a preliminary injunction requiring ALC to post the $400,000 security and restraining ALC from transferring assets. 

The court surveyed case law from several jurisdictions and noted that money damages are generally inadequate to a surety whose demand for collateral security is refused. The court thus found that sureties are often entitled to specific performance enforcing a principal’s promise to post collateral.  However, the court held that a surety’s entitlement to specific performance of the collateral obligation does not also automatically include the right to have the obligation enforced at the outset of proceedings by way of preliminary injunction.

Most critically, the court found that the surety had not shown that it would be irreparably harmed in the absence of the requested relief. To make such a showing, the surety would have had to demonstrate that it lacked sufficient funds to investigate or pay the bond claims without the security, or that the principal is insolvent or secreting assets.  Absent such proof, the surety’s investigation and payment of claims from its own accounts does not constitute irreparable harm because the surety can be made whole in an action for money damages against the principal.

Although the absence of irreparable harm was dispositive, the court further noted other elements for injunctive relief were lacking. It found that Allied did not clearly establish that its claim for specific performance would succeed on the merits because ALC raised colorable affirmative defenses of equitable estoppel and unclean hands.  The court further found that the balance of harms favored ALC because its ability to continue its operations would be put in peril if it were required to post the $400,000 collateral.  Allied, on the other hand, did not contend that it lacked sufficient funds to investigate and pay the bond claims, or otherwise continue its operations, without the security.

To view the full text of the court’s decision, courtesy of Lexis®click here.

Stephen W. Kiefer

 

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