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Jay M. Mann, Esq.
Quia Timet:
A Remedy for the Fearful Surety
American Bar Association, 20 Forum 685,
Summer 1985
Please note that this
web-formatted version of the article does not include citations and other
footnotes. To view the original footnoted article with related appendices,
please view the PDF version.
I.
Introduction
According to Black’s Law
Dictionary, quia timet is a Latin phrase meaning “because he fears or
apprehends.” In fact, quia timet is the technical name of an equitable
remedy which can be extremely valuable to the surety practitioner. Although
bills quia timet date back to ancient Common Law, their modem
applications have not been generally known or sufficiently used by the surety
industry.
Quia timet has
been the subject of discussion by numerous legal scholars. In particular,
several articles of recent vintage have treated limited aspects of the broad
quia timet remedies which are available to sureties. However, no article
known to the author has made a comprehensive study of quia timet since
the article of Walter W. Downs, entitled “Quia timet as a Preventer of
Anticipated Mischief,” presented to the 1956 Annual Convention of the American
Bar Association.
There have been
significant developments in the case law of quia timet in the years since
the Downs article. This writing is intended to provide an update of the law of
quia timet, and also to furnish the reader with practical suggestions for
use of this valuable weapon in the surety’s modem-day arsenal of remedies.
II. HISTORICAL
BACKGROUND
A bill quia timet
is a bill in equity to protect a party against the occurrence of some future
injury which he fears he may suffer, and which he cannot avoid by a present
action at law. It is a remedy of particular importance to the surety of a
construction contractor because it may be utilized, under appropriate
circumstances, prior to the time that the surety’s liability has become fixed.
Quia timet is not, however, restricted to use by sureties. For example,
quia timet may properly be used to seek cancellation of a negotiable
instrument which is voidable while in the hands of a present holder, but which
may be enforced against the maker if it is transferred to a bona fide purchaser
for value.
Quia timet was
originally enforced as a writ of prevention. There were six writs at ancient
Common Law (all of which are now obsolete) that could be maintained quia
timet before “molestation, distress or impleading.” These were called
Brevia Anticipantia – anticipatory relief to accomplish the ends of
precautionary justice. The common thread underlying these six ancient writs was
that quia timet should be applied so as to prevent wrongs or anticipated
mischiefs, and not merely to redress wrongs after they were done.
Many courts have taken
the Latin phrase literally and applied bills quia timet in unexpected
"fearful" contexts. These include the following:
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Suit to determine
plaintiff’s status as the wife of defendant;
-
Suit by wife to
declare that Mexican divorce decree was invalid;
-
Suit for cancellation
of execution upon judgment;
-
Suit to determine
title to shares of stock;
-
Suit to determine
liability insurer’s duty to defend;
-
Suit to remove cloud
on title;
-
Suit to establish
upon real property;
-
Suit to quiet title
to vessel;
-
Suit by property
owner to determine that he had never been the owner of a supper club and
therefore not liable for cabaret taxes;
-
Suit to determine
patent infringement;
-
Suit to perpetuate
testimony of severely injured person in action thereafter commenced;
-
Suit to set aside
antenuptial agreement due to fraud and misrepresentation.
These cases are
representative of the many factual situations to which quia timet may be
applicable. All of these cases involved an absence of actual present injury, a
reasonable apprehension of future injury, and danger that irreparable harm would
result if the relief prayed for was not granted. The combination of these
essential elements made quia timet appropriate relief under the disparate
factual circumstances of the above cases.
III. CONSTRUCTION SURETY’S USE OF QUIA TIMET
It has been said that ‘no
principle in equity is more familiar or more firmly established than that a
surety, after the debt for which he is liable has become due, without paying or
even being called on to pay a debt, may me a bill in equity in the nature of a
bill quia timet to compel the principal to exonerate him by its payment,
provided no rights of creditors are prejudiced thereby.’
This oft-repeated
statement demonstrates the importance of quia timet in surety law.
Nevertheless, the courts and legal scholars have frequently confused the
exoneration and quia timet rights of the surety. An understanding of the
distinction between exoneration and quia timet is essential to proper
representation of the surety.
In the context of a
bonded construction contractor, exoneration is the surety’s right to require
that contract proceeds be used to pay contract obligations of its principal
which, if unpaid, shall become the obligation of the surety. Also, exoneration
includes the surety’s right to require its principal to use his own funds to
discharge the primary obligation for payment, even in the absence of the surety
having made any payment itself in discharge of its secondary bond obligation.
Quia timet is the
surety’s right to relief when it justifiably fears that contract proceeds may be
diverted from contract obligations. Also, quia timet includes the
surety’s right to require its principal to post security for discharge of his
principal obligation for payment under appropriate circumstances of anticipated
liability by the surety. A surety is under no obligation to seek quia timet
relief. On the other hand, the surety’s failure to act promptly at the time of
anticipated liability may result in substantially increased liability at a later
date. This article will next explore the two areas of quia timet relief
that most frequently arise in surety practice: (a) preventing the diversion of
contract funds, and (b) requiring the principal and indemnitors to post security
for anticipated bond losses.
A. Preventing the Diversion of Contract Funds
1. Surety’s Rights in
Contract Funds
Upon the principal
contractor’s default of the bonded construction contract (including default in
obligations to laborers and materialmen), the surety is entitled to have
contract proceeds applied to contract obligations. Alternatively, the surety is
entitled to be reimbursed from contract proceeds to the extent of payments made
in discharge of bond obligations. The practical problem facing the surety is how
to preserve the contract funds until its obligations are clearly defined.
In Prairie State Bank
v. United States, the United States Supreme Court first addressed the
surety’s subrogated interest in unpaid contract funds. It was held that a
completing surety on a public works project was entitled to receive the contract
funds because it was legally subrogated to the owner’s position. Such common law
subrogation allowed the surety to prevail over a bank-assignee of the contractor
who made a two-fold argument to the contract funds, i.e., the bank asserted a
contractual claim arising from a written assignment executed by the contractor
and also an equitable claim because its money had been used by the contractor to
finance performance at the bonded project. The Court rejected both claims by the
bank, on the rationale that the contract proceeds constituted the security which
the owner held to guarantee performance by the contractor. When the surety
performed in lieu of the contractor, it became subrogated to all rights of the
owner, including the owner’s right to hold contract proceeds as security and
backcharge to the extent of losses.
Twelve years later, the
Supreme Court expanded the Prairie State ruling in Henningson v.
United States Fidelity & Guaranty Company. In addition to the surety’s
subrogated interest for completion of construction, the Court held that the
surety also had a subrogated interest in contract proceeds for reimbursement of
claims that the surety was required to pay laborers and materialmen under the
payment bond for the project.
The Prairie State
and Henningson cases were decided at the time of the Heard Act, the
predecessor of the Miller Act. Any doubt as to the continuing validity of the
surety’s rights in unpaid contract proceeds under the Miller Act was resolved in
the 1962 United States Supreme Court case of Pearlman v. Reliance Insurance
Company. In this contest between the surety (who had paid claims pursuant to
its Miller Act payment bond obligations) and the trustee for the bankrupt
contractor, the Court ruled that the surety was entitled to the contract
balances. Mr. Justice Black, writing for the majority, stated:
We therefore hold in
accord with the established legal principles stated above that the Government
had a right to use the retained fund to pay laborers and materialmen; that the
laborers and materialmen had a right to be paid out of the fund; that the
contractor, had he completed his job and paid his laborers and materialmen,
would have become entitled to the fund; and that the surety, having paid the
laborers and materialmen, is entitled to the benefit of all these rights to the
extent necessary to reimburse it. Consequently, since the surety in this case
has paid out more than the amount of the existing fund, it has a right to all of
it. (Emphasis added.)
A new challenge is now
being asserted to the surety’s subrogated right to contract proceeds, in the
situation when the principal contractor is a chapter 11 (reorganization) debtor
in a pending bankruptcy proceeding. Similar to the argument rejected in the
Pearlman case regarding the effect of the Miller Act, it has been argued
that enactment of the 1978 Bankruptcy Code impliedly overruled earlier Supreme
Court cases dealing with the subrogation rights of a surety. At least one
bankruptcy court, in a published opinion, accepted the argument that the
surety’s subrogation rights were modified by the new bankruptcy law, while
another bankruptcy court has ruled in favor of the surety on this issue.
Particularly due to the prevalence of chapter 11 bankruptcy filings, this is an
important issue that will probably have to be decided ultimately by the United
States Supreme Court. It is a subject which is beyond the scope of this article,
and so it will be assumed in this article that the surety’s subrogation right to
contract proceeds continues intact in the bankruptcy context, and all other
situations of default by the principal contractor.
2.
Requirements for Quia Timet relief to Protect Contract Funds
The right to have
contract proceeds applied to contract obligations is meaningless unless the
surety may take protective actions to prevent dissipation of the proceeds.
Before actually making any bond payments, the surety does not technically have
subrogation rights in the interest proceeds. If, however, it has a reasonable
basis for fearing dissipation, then the surety may bring a quia timet
suit to compel exoneration by the principal contractor.
The surety practitioner
should be aware that the concept of quia timet is not always readily
accepted by the courts. For example, in Morley Construction Co. v. Maryland
Casualty Co., the Eighth Circuit originally ruled that the surety of an
insolvent contractor was not entitled to exoneration because its bond liability
had not matured. After reversal and remand by the Supreme Court, the Eighth
Circuit then decided that the surety had made out a valid claim for quia
timet relief. Although the record failed to disclose any indication that the
contractor intended to voluntarily divert contract funds, the Morley
court ruled in the latter opinion that the contractor’s insolvency provided the
surety with a reasonable apprehension of diversion. Accordingly, the surety’s
request for exoneration was granted.
Other cases which have
granted quia timet relief to sureties in similar circumstances include
National Surety Corp. v. Barth, (right of surety to have contract funds paid
to payment bond claimants was held superior to right of contractor to such
funds, and superior to right of United States to which contractor owed income
taxes), Western Casualty and Surety Company v. Biggs (court seized
contract funds due to contractor who had failed to pay subcontractors at the
bonded project), and Lambert v. Maryland Cas. Co. (surety of an insolvent
contractor entitled to take action to ‘freeze’ contract funds for subsequent
payment of bond claims).
In Western Casualty
and Surety Company v. Biggs, the court set forth the following prerequisite
elements for a quia timet suit to compel exoneration:
The plaintiff originally brought a
suit in equity in the nature of a bill quia timet to enforce its
equity of exoneration from appellant. It is well settled that a court of
equity will, at the request of a surety, seize funds due its principal and
apply them to the principal’s debts if the surety can show that: the debts
are currently due, the principal is unable or refuses to pay them, and if
they are not paid the surety will become liable. (Emphasis added.)
The remedy of quia
timet is not unlimited, as shown by the case of Fireman’s Fund Insurance
Co. v. S.E.K. Construction Co. This case involved a dispute between a surety
and contractor’s assignee-bank to a progress payment owed on a bonded highway
project. The contractor had admitted to the surety that it owed $140,000 in
outstanding bills, many of which were past due, but maintained that it was not
insolvent because credit arrangements had been made with its creditors. No
claims had been made against bonds issued by the surety, and the contractor was
not in default in its work at the bonded project. The court ruled that the
surety should not have in court ruled that the surety should not have instructed
the State Highway Department to withhold the progress payment which the
contractor intended to endorse to the assignee-bank. The court’s reasoning for
refusing the surety’s quia timet request was that the surety’s rights to
exoneration and subrogation could not be asserted unless and until a default by
the contractor occurred; only when the contractor was in default under the
bonded contract, according to the court, would the surety prevail over the
contractor and the contractor’s bank. The Morley Construction case was
distinguished as follows:
The Morley case
applied the identical rules we have heretofore set out, and reached the decision
that a bill in the nature of quia timet permitted the surety’s
exoneration, only because of facts which do not exist in the instant suit.
First, the construction company was insolvent when the bill of complaint was
filed. Second, the creditors were demanding payment on past due bills. Third, an
agreement had been entered into between surety and principal whereby the former
loaned the latter large sums of money to keep the company operational, in
exchange for which the principal agreed to first apply the construction contract
proceeds to bills for labor and materials furnished.
The S.E.K.
Construction case illustrates the danger of a surety being overanxious in
seeking to enforce its quia timet rights. Reading between the lines of
the court’s opinion, the contractor was in serious financial difficult that,
with more time, probably would have resulted in a default situation. For this
purpose, the contractor’s failure in either performance of construction work or
in payment of laborers and materialmen would have been sufficient for the surety
to take protective action. While the S.E.K. Construction court case may
be criticized for adopting an overly restrictive view of when a contractor is in
default, the surety should definitely have waited to file suit until it had a
better factual foundation upon which to seek quia timet relief.
Indeed, the courts
generally adopt a broad view of when a contractor is in default at a bonded
project. Default is a factual question, and its determination often requires
careful review of the bonded contract. Also, the terms of the surety’s bond are
read into the contract, and so there is a default under the contract whenever
there is a default under the bond. As explained by the court in U.S. Fidelity
and Guaranty Company v. A&A Machine Shop, Inc.:
There is authority for
the principle that all contractual instruments between the prime contractor and
the government be construed together in ascertaining the obligations which run
thereunder. Thus, it has been held that government projects require payment of
subcontractors, failure to pay constituting a failure to perform and a breach of
the contract.
3. Procedural
Considerations
In Martin v. National
Surety Co., the United States Supreme Court granted quia timet
relief, in the form of an injunction, to prevent the diversion of contract
proceeds before paying valid claims of laborers and materialmen. The Court based
its injunctive relief on two grounds. One, an assignment in the indemnity
agreement with the surety, effective upon default by the contractor, to the
extent needed to pay bond claimants. Two, under common law, the failure to pay
laborers and materialmen was a sufficient default to require the contractor to
turn over payments to the surety upon appropriate demand. The progress payments
were turned into the court for the benefit of unpaid laborers and materialmen.
Other courts have
followed Martin and required deposit of contract funds into court for
distribution to laborers and materialmen, with the surplus (if any) distributed
to the principal contractor, contractor’s assignee bank and others according to
a priority formula established by the court. In many ways, these cases resemble
interpleader suits in which the surety’s superior right to the contested fund is
recognized by the court.
The problem with this
procedure is that it is too cumbersome for an ongoing construction project.
Dynamics of keeping laborers and material suppliers paid and the work going
forward according to schedule do not permit the time-consuming deliberation
often required by the judicial process. These authors suggest that a joint
control trust account be established to which progress payments are deposited
and, after verification by the surety, from which project bills are paid.
Court approval for
establishment of a trust account will be needed unless the contractor will agree
to share control of project receipts and payments with the surety. Even if the
contractor will so agree, court approval must be obtained if the contractor is a
debtor-in-possession in a pending chapter 11 bankruptcy proceeding. Precious
time can slip away while court approval is being obtained. Accordingly, it is
suggested that surety immediately place the bond obligee on written notice of
its claim to unpaid contract proceeds upon learning of the default, and thereby
freeze the funds until a trust account can be judicially approved.
The surety’s rights will
be prejudiced if the notice to the bond obligee is not promptly sent. Such
notice may be in the form of a simple letter which advises the obligee of the
principal’s default under the bond, of the surety’s known bond obligations due
to the default (e.g., known debts owed to laborers or material suppliers at the
project), and of the surety’s equitable right of subrogation to the unpaid
contract proceeds. The letter should conclude with a demand that no contract
funds be paid to any party, in the absence of the surety’s approval, until a
court order is obtained. This letter should preserve the status quo until a
court can determine the priority rights of the various parties to the unpaid
contract funds.
Included in Appendix A to
this article is a form trust account agreement, which is adapted from an actual
agreement approved by the Bankruptcy Court for completion of a project by a
debtor-in-possession contractor. When this trust agreement was executed, the
contractor was behind in payments to project creditors, but the surety had not
yet paid any claims and the extent of its bond obligations were not known. Court
approval was obtained for the trust agreement on the basis of the surety’s
reasonable fear of bond losses, under the doctrine of quia timet, unless
project funds were strictly applied to project expenses incurred by the debtor
in the course of its bonded contract. Hopefully, it will be a useful form for
other situations that may be encountered when a trust agreement is needed,
particularly when the bonded project is being completed by a chapter 11
debtor-in-possession.
B. Requiring Collateral to Cover Anticipated Bond Losses
1. Surety’s Right to
Have Collateral Posted by Indemnitors
All too often, the
remaining contract proceeds at a project are insufficient for the surety to
complete performance and pay the bills of the bonded contractor. Due to
practices of underbidding, frontloading, using project funds for unrelated
purposes, and a myriad of other reasons, the surety may be faced with tremendous
losses unless its indemnitors will provide funding from their personal assets.
Theoretically, the surety
should never incur any loss, as its principal and indemnitors are fully liable
to the surety for the amount of damages and expenses which may be suffered in
connection with issued bonds. The written indemnity agreement, underlying
issuance of bonds, typically provides that the principal (contractor) and
indemnitors (individuals or companies, including the principal, who have agreed
to be responsible for obligations owed to the surety) shall ‘indemnify and keep
indemnified, and hold and save harmless the surety against all demands, claims,
loss, costs, damages, expenses and attorneys’ fees whatever, and any and all
liability therefore sustained or incurred by the surety by reason of executing
or procuring the execution or procuring the execution of any bonds.’ Although
the terminology changes in indemnity agreements of different sureties, the
purpose of all such agreements is to include every conceivable type of damage
and expense within the scope of the indemnity obligation to the surety.
The written indemnity
agreement also typically provides that the surety may take action against its
indemnitors in anticipation of losses. The following type of provision is
probably the most common within the industry:
That if Surety shall be required or
shall deem it necessary to set up a reserve in any amount to cover any
claim, demand, liability, expense, suit, order, judgment or adjudication
under or on any Bond or Bonds or for any other reason whatsoever, the
principal and indemnitors shall immediately upon demand deposit with Surety
an amount of money sufficient to cover such reserve and any increase
thereof, such funds to be held by Surety as collateral, in addition to the
indemnity afforded by this instrument, with the right to use such funds or
any part thereof, at any time, in payment or compromise of any liability,
claims, demands, judgment, damages, fees and disbursements or other
expenses.
Note that the surety’s
right to have collateral posted in the above provision is conditioned upon the
establishment of a liability reserve. Although this is not normally a problem,
there may be fast-breaking situations in which the surety requires collateral
from indemnitors in advance of establishment of the liability reserve. The
following provision (loss frequently found in form indemnity agreements) is more
flexible:
In order to exonerate or
indemnify Surety, the principal and indemnitors shall upon demand of Surety,
place Surety in funds before Surety makes any payment; such funds shall be, at
Surety’s option, money or property, or liens or security interests in property.
(The amount of such money or property, or the value of the property to become
subject to liens or security interests, shall be determined by Surety.)
Obviously, the amount of
surety’s demand to be placed in funds (i.e., to be collateralized) under this
provision must be reasonably related to the amount of anticipated losses. As
this provision is less restrictive upon the surety than the former provision
quoted above, it is preferred for a surety’s form indemnity agreement.
2. Requirements for
Quia Timet Relief to Obtain Collateral
The contractual right of
the surety to be placed in funds or collateralized by its indemnitors is
independent of, and in addition to, the common law. Under the doctrine of
quia timet, such common law right may be exercised, before the bond
obligations become due, under appropriate circumstances of anticipated loss. The
following quotation from Corpus Juris Secundum is illustrative of the
common law:
In equity and under some statutes,
after the maturity of the debt or accrual of liability, a surety who has not
paid the debt, even though he has not been troubled by the creditor, has a
right to compel the principal to exonerate him from liability, to pay the
debt, or to secure him against loss.
Doster v. Continental
Casualty Company, involved a contractor, Doster, who declared to his surety,
Continental, upon completion of a school construction project that he was unable
to pay approximately $24,000 owed for materials used at the project. Doster had
$21,000 on hand, the bulk of which consisted of progress payments received from
the school, but refused to pay the material suppliers whose accounts were past
due. The surety brought a quia timet suit, and prayed that the court
order Doster to use all available funds to pay project bills and, if such funds
were not sufficient, then that Doster “be required to protect and secure and
indemnify Continental by a transfer of all his assets not subject to exemption
over to Continenta1.” The trial court granted surety a temporary injunction
consistent with its prayer for relief: which injunction was later made
permanent.
Although Doster had
signed a written indemnity agreement which included a provision for transferring
assets to the surety as collateral, the court’s affirmance of the trial court’s
injunctive relief was decided on common-law principles. In particular, the court
rejected the argument that fraudulent disposition of property, or any other
special reason for fearing a loss, had to be shown before a surety could invoke
its quia timet rights. The following essential elements were set forth in
the Doster opinion for requiring a contractor to transfer assets as
collateral to the surety:
The requirements of our cases for a
bill of exoneration are more than met in the bill in the instant case in
that:
-
The relationship of surety and
principal is alleged.
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It is averred that the
respondent had, in substance, declared himself in default under his bond
by reason of his inability and failure to make payment of the bills of
materialmen who had furnished material and supplies for the construction
of the North Roebuck School on which the complainant was the
contractor’s surety.
-
It is averred that numerous of
the materialmen who had furnished the project had made demand upon the
complainant, Continental Casualty Company as surety, for payment under
the terms of the performance and labor and material payment bond which
the surety had executed on the respondent as principal pursuant to the
provisions of § 16 of Title 50 of the Code of Alabama of 1940.
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Averments are made concerning
the financial status of the respondent, including his possession and
control of substantial funds collected as earnings off of the
construction of the job bonded by the complainant, and the refusal of
the respondent to use same for the payment of the material bills
incurred on the project.
-
The Complainant in the bill
offers to do equity and avers that it makes no effort to avoid its
secondary liability to the materialmen for the reasonable value of
materials and labor furnished for the construction of the North Roebuck
School, for which the materialmen would be entitled to recover from the
complainant as surety pursuant to the aforesaid public works statute,
and further avers that equity, good conscience and simple honesty
dictate and require that the respondent be made to fulfill his
obligations to the extent that he is reasonably able, and that the
complainant, as his surety, be permitted exoneration to the extent that
the materialmen and obligee under the bond for the construction of the
North Roebuck School will not be prejudiced on any valid and legitimate
claims possessed by them.
In theory, the surety
should be able to obtain an injunctive lien upon assets whenever it can meet the
five essential elements of common law cited in the above passage. However,
judges are sometimes reluctant to grant such drastic relief based upon strict
application of common law principles. Most judges prefer to couch their decision
in the form of specific performance of the written indemnity agreement. For
example, in United Bonding Insurance Company v. Stein, the operative
provision of the indemnity agreement for collateralization was conditioned upon
the surety’s establishment of a liability reserve. The indemnitors refused to
comply with surety’s demand for funds equal to its established reserve, and so
the surety brought suit to compel security. The court denied the indemnitors’
motion to dismiss in the following passage:
When stripped to its essentials,
this action is simply one for the specific performance of a contractual
agreement. Unlike the situations with which the cases cited by defendant
petitioners were involved, the instant controversy concerns defendants’
promise to place funds in reserve, should the plaintiff deem such precaution
necessary. Hence consideration of instances of contracts to indemnify
against actual loss is not relevant. ...
In the instant case the only
conditions precedent to defendants’ obligation were the plaintiffs estimate
that a reserve was necessary and its demand upon defendants for current
funds in the amount of such reserve. Once these conditions are fulfilled
equity will specifically enforce such a promise where, as in the instant
case, a legal remedy for subsequent damages would not suffice, ...
Also in the Ninth Circuit
case of Milwaukie Construction Co. v. Glens Falls Insurance Co., the
court specifically enforced the provision in an indemnity agreement requiring
indemnitors to post adequate security upon establishment of a liability reserve.
The argument that such relief could not be given until after payment of bond
claims was rejected, on the basis of the surety’s quia timet right to
compel exoneration and obtain security against loss upon accrual of the bond
liabilities.
An essential element for
specific performance of any contract is inadequacy of remedy at law. In the
Stein case, the court stated, without discussion of this issue, that a legal
remedy for subsequent damages would not suffice when an indemnitor refuses to
voluntarily comply with a surety’s demand for collateral. The Milwaukie
Construction court also seemed inclined to rule that inadequacy of remedy
could be presumed in these circumstances; there was evidence that one of the
indemnitors in the Milwaukie Construction case had transferred assets out
of the country to avoid creditors, which additionally supported the court’s
finding of an inadequate remedy of law. Also in the Doster case discussed
above, the court ruled that a showing of fraudulent disposition of property was
not a prerequisite to quia timet relief against the indemnitors.
These authors believe
that inadequacy of remedy should be presumed upon the indemnitors’ failure to
voluntarily post collateral. When the issuance of bonds was first contemplated
by the principal and surety, the indemnitors had promised to provide collateral
to the surety under appropriately described circumstances in the indemnity
agreement. If such promise cannot be enforced when later needed in an equitable
action for specific performance, but rather must await determination in a legal
action for damages, then the promise to collateralize is meaningless. After all,
in another provision of the agreement, the indemnitors have already agreed to
fully repay surety for all of its losses and expenses. Unless the surety has
recourse to obtain collateral while the lawsuit for damages is pending, then the
promise to collateralize adds nothing to the surety’s rights under the
agreement.
Nevertheless, the
cautious surety practitioner should attempt to learn all facts which will
bolster its position that there is not an adequate legal remedy to protect the
surety. This is particularly important when the collateral is first pursued in a
lawsuit with a request for temporary restraining order or preliminary injunction
against the indemnitors. Certainly any evidence of asset transfers, such as in
the Milwaukie Construction case, will be most helpful in obtaining the
desired relief from the court.
Also, the surety
practitioner should be sure that the conditions precedent set forth in the
indemnity agreement have been strictly complied with. In Maryland Casualty
Co. v. Straubinger, the appellate court reversed the trial court’s award of
specific performance under the indemnity agreement. The reason for the reversal
was that the indemnity agreement stated that funds had to be immediately
deposited by the indemnitors upon the surety setting up a reserve ‘required by
the State Insurance Department.’ The appellate court strictly interpreted this
provision; as there was no proof that the State had actually required
establishment of the liability reserve in that case, the court held that the
condition precedent had not been met.
3. Procedural
Considerations
Probably even more so
than when trying to prevent dissipation of contract funds, there is a great need
for the surety to take prompt action when seeking collateralization from
indemnitors. Injunctive relief to prevent transfers of assets is required.
However, to have any real benefit to the surety, the injunction must be entered
at the commencement of the lawsuit against the indemnitors, and must be in
effect during the pendency of the litigation. Otherwise, the assets may be gone
by the time that the surety can have final judgment entered against the
indemnitors.
The case of Doster v.
Continental Casualty Company is the strongest authority for the opposition
that the surety must have a preliminary injunctive relief to protect his rights.
It is suggested this case be closely studied and followed when seeking a
preliminary injunction on behalf of a surety against its indemnitors.
Included in Appendix B to
this article is a set of pleadings which were used in a case to obtain a
temporary restraining order, without notice, from a federal district court. The
order specifically provided the surety with a lien upon all assets of
indemnitors and prohibited the indemnitors from transferring assets during the
pendency of the order. Diversity jurisdiction was invoked to enable the district
court to hear the case. The surety preferred to have an order from the federal
court, rather than from the state court, because there was the possibility that
out-of-state assets were owned by the indemnitors. Enforcement of injunctions,
particularly affecting disposition of real property, is more easily accomplished
across state lines with orders of the federal court.
Rule 65 of the Federal
Rules of Civil Procedure governs issuance of temporary restraining orders by
federal district courts. It provides that a temporary restraining order may only
be entered if it clearly appears from specific facts shown by affidavit or by
verified complaint that immediate and irreparable injury will result before the
adverse party can be heard in opposition, and that the applicant’s attorney must
certify in writing the reasons why notice to the adverse party should not be
required. The order only remains in effect for ten days, unless extended by
agreement of the parties or for good cause shown for an additional ten days. The
hearing on applicant’s motion for preliminary injunction, after notice to the
adverse party, must be scheduled at the earliest possible time and take
precedence over other matters before the court. Finally the temporary
restraining order must be supported by an injunction bond, in an amount to be
determined by the court.
The pleadings included in
Appendix B are a complaint for injunctive and other relief, and an application
for temporary restraining order. In that case, a hearing on preliminary
injunction was held four days after service of the temporary restraining order
upon the indemnitors. The court sustained surety’s request for quia timet
relief, and a preliminary injunction was entered for the pendency of the
litigation.
Obviously, these form
pleadings must be adapted to the particular facts of the situation in which they
are used. In particular, if the indemnitors are known to have transferred assets
or done other things which give the surety special reason to be fearful, these
facts should be specified in the pleadings. Even without such special reasons
for being apprehensive (as in the case in which the pleadings were actually
used) the surety should be able to enforce its quia timet rights with a
temporary restraining order, followed shortly thereafter with a preliminary
injunction entered after notice and opportunity for hearing to the indemnitors.
4. Procedural Due
Process Rights of Indemnitors
The indemnitors may argue
that preliminary injunctive relief, and particularly a temporary restraining
order issued without notice, violates their procedural due process rights.
However, a review of the leading cases on this issue shows that due process
rights are not being infringed.
The first United States
Supreme Court case on the subject of procedural due process, in a series of
cases from 1969 to 1975, was Sniadacb v. Family Finance Corp. In that
case, the Court ruled that due process required that garnishment of wages be
preceded by notice and opportunity for hearing. Crucial to the Court’s holding
was the unique importance of wages to the debtor and the severe deprivation
which would be caused by a wrongful garnishment.
The second case was
Fuentes v. Sbevin, in which it was held that a state replevin statute was
unconstitutional. In extremely broad terms, the Court’s opinion stated that,
except in extraordinary circumstances, deprivation of property had to be
preceded by notice and an opportunity for hearing in which the debtor could
dispute the creditor’s claims. Justice White, in a dissenting opinion, urged a
balancing test which weighed the debtor’s due process interest against that of
the creditor’s property interest.
Justice White wrote the
majority opinion in the third case in the series. In Mitchell v. W. T. Grant
Co., the balancing approach was used to uphold a Louisiana sequestration
statute which failed to provide for prior notice and hearing for the debtor.
Significant to the balancing process were the measures adopted by the state to
minimize the risk of a wrongful taking of property. In particular, the statute
required the creditor to file an affidavit consisting of specific facts
supporting the writ of execution, and declared that only a judge could issue the
writ. The importance of judicial control was stressed in the following quotation
from the majority opinion:
The Louisiana sequestration statute
followed in this case mandates a considerably different procedure. A writ of
sequestration is available to a mortgage or lien holder to forestall waste
or alienation of the property, but, different from the Florida and
Pennsylvania systems, bare, conclusory claims of ownership or lien will not
suffice under the Louisiana statute. Article 3501 authorizes the writ ‘only
when the nature of the claim and the amount thereof, if any, and the grounds
relied upon for the issuance of the writ clearly appear from specific facts’
shown by verified petition or affidavit. Moreover, in the parish where this
case arose, the requisite showing must be made to a judge, and judicial
authorization obtained. Mitchell was not at the unsupervised mercy of the
creditor and court functionaries. The Louisiana law provides for judicial
control of the process from beginning to end.
The fourth Supreme Court
case in the series was North Georgia Finishing, Inc. v. Di-Chem, Inc. By
relying largely on Fuentes to invalidate a Georgia prejudgment
garnishment statute it added to, rather than clarified, the confusion arising
from the three earlier cases. It is significant that the Georgia statute did not
provide the protective measures, particularly judicial participation, which were
so important to the balancing process used in the Mitchell case.
Later due process cases
of the Supreme Court have employed the balancing test suggested by Justice White
in his dissenting opinion to Fuentes and his majority opinion in
Mitchell. Lower court cases have also generally followed the balancing
approach, giving special consideration to review by a judicial officer and
opportunity for early hearing.
If warranted by the
circumstances, the surety should seek a temporary restraining order against the
indemnitors to enjoin transfer of assets. Although there are no cases directly
addressing the question of whether such order will violate the indemnitors’ due
process rights, the balancing approach of Mitchell and other above cited
cases should uphold the order. As in Mitchell, there are measures in
effect to minimize the risk of a wrongful taking of property. The surety’s
affidavits and pleadings supporting the temporary restraining order, as required
by the Rules of Civil Procedure, must specifically set forth the reasons for the
order, and a requisite showing for relief must be approved by a judicial
officer. Clearly, the surety has a valid property interest in obtaining
collateral, as promised by the indemnitors, upon reasonable apprehension of
liability; this property interest may be irreparably prejudiced unless relief is
immediately granted. On the other side of the balancing process, the indemnitors
will only be deprived of their right to transfer assets for the few days that
pass until the indemnitors can be given notice and an opportunity for hearing.
Further, an injunction bond protects the indemnitors from damage for the short
time that the injunctive order is in effect without notice. Under these
circumstances, it appears that the balancing process employed by the Mitchell
court would uphold the procedure for the surety to obtain a temporary
restraining order under appropriate circumstances discussed above.
IV. CONCLUSION
Quia timet is an
extremely useful remedy for the surety. The mere threat of resort to quia
timet remedies may result in the requested, but previously declined,
cooperation of the principal and indemnitors.
It is, however, a drastic
remedy that must be used sparingly in circumstances of justified apprehension of
losses. Overzealous use of this remedy in situations where injury is not
reasonably anticipated or prior to default of the principal, as in the S.E.K.
Construction case, may result in the court’s rejection of the doctrine of
quia timet entirely.
Of course, the principal
and indemnitors are not without remedy themselves. Bankruptcy, either in the
form of a straight liquidation (chapter 7) or a reorganization (chapter 11) is
always available to them. If they choose to file a voluntary bankruptcy petition
within 90 days following a judicial order giving surety an involuntary lien upon
assets, then the lien is subject to avoidance as a preferential transfer under
bankruptcy law. Furthermore, other creditors of the principal or indemnitors,
with claims exceeding $5,000, may choose to file an involuntary bankruptcy
petition, the effect of which will also be to make a voluntary or involuntary
lien in favor of the surety, within the preceding 90 days, subject to voidance
under bankruptcy law. The surety will then only have the status of an unsecured
creditor in the bankruptcy proceeding.
Thus, the ultimate effect
of a quia timet suit may be to force the principal and indemnitors into
bankruptcy. However, even in a bankruptcy situation, the surety is entitled to
have contract proceeds applied to bonded contract obligations. Furthermore, the
bankruptcy proceeding will place the assets of the principal and indemnitors
under the auspices of the bankruptcy court, which should accomplish the intended
result--the prevention of fraudulent diversion of assets from the surety.
Whenever the construction surety is faced with
potential bond losses and a recalcitrant principal contractor or indemnitor, the
remedy of quia timet should be considered. It is not suitable for all
situations, and the surety practitioner must determine, on a case-by-case basis,
whether quia timet may properly be invoked and whether it will really be
beneficial to the surety. However, under appropriate circumstances of default
and reasonable apprehension of liability, quia timet may be the only
practical means by which the surety may preserve funds or other assets for
subsequent discharge of bond obligations or reimbursement to the surety. In
other words, prompt use of available quia timet procedures may be the
difference between losses and avoidance of losses to the construction surety.
u
APPENDIX A: TRUST AGREEMENT
THIS AGREEMENT made
and entered into this _____ day of ,_______, ___, by and between INSOLVENT
CONSTRUCTION COMPANY, an Arizona corporation (hereinafter referred to as
‘Principal’), and JOHN
OWNER and MARY OWNER,
husband and wife (hereinafter said individuals are collectively referred to as
the ‘Indemnitors’), and FEARFUL INSURANCE COMPANY, a Maryland corporation
(hereinafter referred to as ‘Surety’).
WITNESSETH: WHEREAS,
Surety has heretofore executed bonds from time to time on behalf of Principal at
the request of Principal and Indemnitors on certain projects, including the
following: __________________ (hereinafter referred to as the ‘Bonded Project’).
WHEREAS, Principal and
Indemnitors, to induce Surety to execute the aforesaid bonds on their behalf,
agreed to indemnify and save Surety harmless from any claim, loss, cost, or
expense by reason of executing said bonds;
WHEREAS, on
__________, ___, Principal and Indemnitors executed a General Indemnity
Agreement in favor of Surety wherein and whereunder Principal and Indemnitors,
jointly and severally, agreed to indemnify Surety against any loss or liability
it might incur as a consequence of executing surety bonds on behalf of
Principal;
WHEREAS, on
__________, ___, Principal filed a voluntary petition under Chapter 11 in the
United States Bankruptcy Court for the District of (In re Insolvent Construction
Company, Cause No. ). Principal remains in possession of its property and
continues to operate its business as a debtor in possession;
WHEREAS, Principal is
unable to meet obligations for both performance and payment covered under the
above described bonds for the Bonded Project; and
WHEREAS, Principal,
Indemnitors and Surety agree that the execution of this Agreement and the
performance of its terms, provisions and conditions will be to the mutual
benefit of Principal, Indemnitors, Surety and the general creditors of
Principal, and in furtherance of the performance and completion of the work at
the above described Bonded Project.
NOW, THEREFORE, in
consideration of the mutual promises and covenants hereinafter contained, the
parties hereto agree as follows:
1. Principal and
Indemnitors, and each of them, do hereby reaffirm their General Indemnity
Agreement, dated _______________, 20___, in favor of Surety notwithstanding
anything contained herein.
2. Surety shall have a
first right of priority, superior to all other claims to the unpaid balance of
the contract proceeds (including unpaid draws and retention sums) of the bonded
contract, to the extent necessary to reimburse Surety for any and all losses,
costs, expenses, including attorneys’ fees, and interest on any advances that
may be made by Surety at the rate of ten percent (10%) per annum, which it has
incurred or any hereafter incur as a result of the execution of the
above-described bonds for the Bonded Project.
3. There shall be a bank
account established at the Bank. The account shall be known as the ‘Insolvent
Construction Company Trust Account’ (hereinafter referred to as ‘Trust
Account’).
A. With regard to
the Trust Account:
(1) The Trust
Account shall be a general operations account for the Bonded Project.
(2) The
following monies, receipts or payments shall be deposited in said
account: (a) all monies, presently in the possession of Principal,
representing proceeds or payments received by Principal from the bonded
contract; (b) all monies which may be received, after execution of this
Agreement, representing proceeds or payments from the bonded contract;
and (c) funds that may be advanced by Surety to pay expenses described
in subparagraph (3) below.
(3) The Trust
Account shall be used for the following purposes, for which uses and
purposes a trust is hereby imposed upon said account: (a) to pay all
necessary labor, materials, supplies, equipment, contracts and expenses
for the continued performance of the bonded contract, for which Surety
would be liable under its abovedescribed bonds for the Bonded Project;
and (b) to reimburse Surety to the extent of reimbursement described in
paragraph 2 above.
(4) Withdrawals
to be made from the Trust Account shall be only by checks signed either
(a) by any two designated representatives of Surety, or (b) by anyone
designated representative of Surety and by anyone designated
representative of Principal. The designated representative of Surety and
Principal are set forth in paragraph (B) below.
(5) Nothing
contained in this paragraph 3 shall obligate Surety to provide funding
to Principal. Should the above-described Trust Account be depleted and
funding be needed Principal in connection with performance of the bonded
contract, the decision to provide or not provide funding shall be at the
sole discretion of Surety.
B. The designed
representatives of Surety and Principal, for purposes of withdrawals from
the Trust Account, are as follows:
(1) For Surety:
_______________ Surety shall have the right at any time to name
substitutions in place and instead of these individuals.
(2) For
Principal: _______________ Principal shall have the right at any time to
name substitutions in place and instead of these individuals.
C. It is understood that
the Trust Account shall remain the property of Surety at all times to the extent
necessary for reimbursement described in paragraph 2 above. Surety may, at any
time and without prior notice or consent of Principal or Indemnitors, withdraw
all or any part of the balance of the Trust Account for the purpose and to the
extent of said reimbursement.
D. Principal shall
render periodic accountings, as requested by Surety, of all deposits into and
withdrawals from the Trust Account, together with such payroll reports,
invoices, billings and other supporting documents requested by Surety.
4. Principal shall
execute an irrevocable Direction of Payment to __, owner of the Bonded Project.
Such Direction of Payment shall require the owner to make all payments of the
unpaid balance of the bonded contract proceeds (including unpaid draws and
retention sums) by checks payable to the order of the ‘Insolvent Construction
Company Trust Account,’ and shall further require delivery of such checks to __,
counsel for Surety. Upon receipt, counsel for Surety shall promptly deposit each
check into the Trust Account.
5. It is agreed that
funds in the Trust Account shall be used to reimburse Surety as follows:
First, to the payment of
any advances that may be made directly by Surety, with regard to the bonded
contract, to bond claimants or deposited into the Trust Account or otherwise.
Second, to the payment of all other costs, expenses and attorneys’ fees incurred
by Surety as a result of execution of bonds on behalf of Principal for the
Bonded Project.
6. Surety shall have the
right, through its own employees or by outside auditors, to audit and inspect
the books of Principal at such reasonable time or times as it may desire.
7. Principal and
Indemnitors agree that Surety may at any time, in its sole discretion and with
or without cause or notice, terminate this Agreement; provided, however, such
termination shall not in any way lessen Surety’s obligations under the
above-described bonds for the project. Principal and Indemnitors agree and fully
understand, and have had the advice of counsel, that this provision is for the
protection of Surety.
8. Principal agrees to do
all things necessary to affirm the bonded contract as soon as such affirmation
can reasonably be accomplished.
9. The rights afforded
Surety under this Agreement are in addition to any and all other rights which
Surety has, may have or acquire against Principal and Indemnitors, whether under
the terms of any indemnity agreements or otherwise. This Agreement shall not be
deemed to modify or alter any existing indemnity or other agreement. In
particular, Surety specifically reserves its right to demand collateral and to
be placed in funds by Indemnitors, and further to take over or relet the bonded
contract, and further to seek the appointment of a trustee or examiner in the
above-described Chapter 11 proceeding.
10. Nothing contained in
this Agreement or done pursuant thereto shall be construed to enlarge any
obligation of Surety under any bond or undertaking executed on behalf of
Principal and it is further agreed that this Agreement is solely for the benefit
of the parties hereto and shall not create any rights in or for any other
persons, firms, or corporations.
11. Any waiver by Surety
of any provisions of this Agreement or any failure on the part of Surety to act
or take advantage of its provisions shall not in any way limit, vary, or
discharge Principal or Indemnitors under this or any other agreement.
12. Principal and
Indemnitors agree to reimburse Surety for any and all reasonable expenses,
including any attorneys’ fees which it may have, or may hereafter incur as a
result of the execution of the above-described bonds or under the terms of this
Agreement.
13. Principal and
Indemnitors hereby agree to all of the terms of this Agreement, and to comply
therewith and to execute any and all instruments deemed by Surety as necessary
or proper to effectuate this Agreement.
14. Time is of the
essence of this Agreement.
15. This Agreement shall
extend to and be binding upon and inure to the benefit of the parties and their
respective successors, heirs and assigns.
16. This Agreement is
expressly conditioned upon formal approval which approval Principal shall seek
to obtain promptly upon execution of this Agreement.
17. To the extent that
Surety is fully reimbursed for any and all losses, costs, expenses and
attorneys’ fees, then remaining proceeds received from the Bonded Project and
any remaining balances in the Trust Account described in paragraph 3 above shall
be promptly paid to Principal.
IN
WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto on
the day and year first hereinabove written.
APPENDIX B
UNITED
STATES DISTRICT COURT DISTRICT OF ARIZONA
TABULAR OR GRAPHIC
MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE
For its complaint
against defendants, plaintiff alleges as follows:
Count
One
I
Plaintiff is a
corporation incorporated under the laws of the State of Maryland and has its
principal place of business in the State of Maryland. Defendant Insolvent
Construction Company (‘Insolvent’) is a corporation incorporated under the laws
of the State of Arizona. Defendants John Owner and Mary Owner, husband and wife,
are citizens of the State of Arizona. The matter in controversy exceeds,
exclusive of interest and costs, the sum of Ten Thousand Dollars ($10,000.00).
Accordingly, this Court has diversity jurisdiction over this action pursuant to
28 U.S.C. § 1332.
II
On or about
______________, ________, Insolvent (as principal) and defendants John Owner and
Mary Owner (as indemnitors) executed a General Indemnity Agreement with
plaintiff. By the terms of such General Indemnity Agreement, defendants agreed,
among other things, to exonerate, indemnify and keep indemnified the surety
plaintiff from and against any and all liabilities, losses and expenses of
whatsoever kind or nature (including but not limited to, interest, court costs
and counsel fees) imposed upon, sustained, or incurred by surety plaintiff by
reason of: (1) surety plaintiff having executed bonds in behalf of principal
Insolvent, or (2) defendants’ failure to perform or comply with any of the
provisions of the General Indemnity Agreement. Further by the terms of the
General Indemnity Agreement, defendants agreed that in order to exonerate or
indemnify surety plaintiff, defendants shall upon demand of surety plaintiff,
place surety plaintiff in funds before surety plaintiff makes any payment; such
funds to be, at the surety plaintiffs option, money or property, or liens or
security interests in property, the amount of such money or property or the
value of the property to become subject to liens or security interests as
determined by the surety plaintiff. A copy of the said General Indemnity
Agreement is attached hereto as Exhibit ‘A’ and incorporated by reference
herein.
III
At the request of
defendants and pursuant to the terms of the said General Indemnity Agreement,
plaintiff, as surety, and Insolvent, as principal, executed payment and
performance bonds, in connection with construction projects in which Insolvent
had agreed to be the general contractor thereon. There are presently outstanding
___ such payment and performance bonds issued by plaintiff for Insolvent, in the
total sum of $ ______.
IV
Defendant Insolvent does
not have the financial resources to pay its obligations on the bonded
construction projects and is therefore in default to its material suppliers and
subcontractors at such projects. Further with regard to Insolvent’s uncompleted
construction contracts, defendant Insolvent does not have the resources to
finance completion of same.
V
Plaintiff justifiably
fears that it will sustain a loss in the completion of the bonded projects.
Further, plaintiff justifiably fears that it will be required to pay claims of
unpaid material suppliers and subcontractors at the bonded projects. To date,
plaintiff has paid, pursuant to its bond obligations, the sum of $ to unpaid
material suppliers and subcontractors of Insolvent. However, based upon a review
of Insolvent’s books and records, and further based upon numerous notices of
claims received from material suppliers and subcontractors, it is estimated that
the losses to plaintiff in connection with the bonds issued for Insolvent will
actually exceed $____________.
VI
In accordance with the
General Indemnity Agreement, plaintiff made demand upon defendants to be placed
in funds prior to making any payment, such funds to be money, property, or liens
or security interests in property as determined by plaintiff. By virtue of the
said General Indemnity Agreement and by virtue of the equitable doctrines of
exoneration and quia timet, plaintiff is entitled to have defendants
place funds or other security with plaintiff that is sufficient to cover the
above-described bond losses.
VII
Defendants have failed
and refused to meet their obligations under the General Indemnity Agreement. In
particular, defendants have refused to place plaintiff in funds, both in the
amount and according to the procedure set forth in the Agreement.
VIII
Upon information and
belief, the assets of the defendant Insolvent are insufficient to adequately
secure plaintiff for its obligations under the above-described payment and
performance bonds. Unless the personal assets of the individual defendants, as
well as the corporate assets of Insolvent, are collateralized, plaintiff will
not be adequately secured for its obligations on the bonded projects.
IX
Plaintiff is entitled to
be fully collateralized by defendants prior to making any further payments in
discharge of its bond obligations. Unless the injunctive relief requested below
is granted, plaintiff will not be adequately secured for its obligations prior
to making such further payments. Further unless the injunctive relief requested
below is granted, defendants are likely to sell, transfer, dispose, lien,
secure, or otherwise divert their assets from being used to discharge
defendants’ obligations to exonerate and indemnify plaintiff, all to plaintiffs
irreparable harm.
X
Plaintiff is without a
plain, speedy or adequate remedy at law, and will be irreparably and permanently
injured unless this Court grants the injunctive and equitable relief as prayed
herein.
XI
Plaintiff has been forced
to retain legal counsel and incur other expenses in pursuit of its rightful
interests in this matter, and is entitled to recompense therefore, pursuant to
the terms of the General Indemnity Agreement.
WHEREFORE, plaintiff
demands judgment against defendants, jointly and severally, as follows:
A. For an order
requiring defendants to render to plaintiff a full and complete accounting of
all assets owned by them or in which they have an interest.
B. For an order
requiring defendants to allow plaintiff full and complete access to all
financial books, records and accounts maintained by them.
C. For an order
requiring defendants to place plaintiff in funds by money, property, or liens or
security interests in property, as determined by plaintiff to be ample security
for its obligations on the bonded projects.
D. For an order
permanently enjoining and restraining defendants from selling, transferring or
disposing or liening their assets and property, and further enjoining and
retraining defendants from allowing their assets and property to be liened,
unless and until plaintiff shall be placed in funds as prayed for in paragraph
(C) above.
E. For an order granting
a lien upon all assets and property, including realty, personally and mixed,
owned by defendants and property in which defendants have an interest. Such lien
shall secure plaintiff against any loss that it may sustain or incur by virtue
of its having executed bonds for Insolvent. Such lien shall remain in effect
unless and until plaintiff shall be placed in funds as prayed for in paragraph
(C) above.
F. For an order
requiring defendants to indemnify and exonerate plaintiff for all liabilities,
losses and expenses incurred by plaintiff as a result of plaintiff having
executed bonds for Insolvent.
G. For plaintiff’s
costs, including reasonable attorneys’ fees, incurred herein.
H. For such other and
further relief as this Court deems just and equitable.
Count
Two
XII
By this reference,
plaintiff incorporates the allegations contained in paragraphs I through XI,
inclusive, of the complaint.
XIII
By the express provisions
of the General Indemnity Agreement and by virtue of the equitable doctrines of
exoneration and quia timet, plaintiff is entitled to be placed in funds,
upon demand, prior to making further payments upon its bonds issued for
Insolvent. Unless preliminary injunctive relief is granted, plaintiff will not
be adequately secured for its obligations prior to making further payment
thereon. Further unless the preliminary injunctive relief is granted, defendants
are likely to sell, transfer, dispose, lien, secrete, or otherwise divert their
assets from being used to discharge defendants’ obligations to exonerate and
indemnify plaintiff, all to plaintiffs irreparable harm.
WHEREFORE, plaintiff
prays that the Court grant the following preliminary relief:
A. Issue its order to
defendants to show cause at the earliest possible date why the relief demanded
herein should not be granted.
B. Schedule a hearing at
which evidence will be taken.
C. Thereafter issue a
Preliminary Injunction which includes the following:
(1) Requires
defendants to render to plaintiff a full and complete accounting of all
assets owned by them or in which they have an interest.
(2) Requires
defendants to allow plaintiff full and complete access to all financial
books, records and accounts maintained by them.
(3) Requires
defendants to place plaintiff in funds by money, property, or liens or
security interests in property, as determined by plaintiff to be ample
security for its obligations on the bonded projects.
(4) Permanently
enjoins and restrains defendants from selling, transferring or disposing or
liening their assets and property, and further enjoins and restrains
defendants from allowing their assets and property to be liened, unless and
until plaintiff shall be placed in funds as prayed for in paragraph (3)
above.
(5) Grants a lien
upon all assets and property, including realty, personally and mixed, owned
by defendants and property in which defendants have an interest. Such lien
shall secure plaintiff against any loss that it may sustain or incur by
virtue of its having executed bonds for Insolvent. Such lien shall remain in
effect unless and until plaintiff shall be placed in funds as prayed for in
paragraph (3) above.
(6) Requires
defendants to indemnify and exonerate plaintiff for all liabilities, losses
and expenses incurred by plaintiff as a result of plaintiff having executed
bonds for Insolvent.
D. For plaintiffs costs,
including reasonable attorneys’ fees incurred herein.
E. For such other and
further relief as this Court deems just and equitable.
APPENDIX C
UNITED STATES DISTRICT
COURT DISTRICT OF ARIZONA
TABULAR OR GRAPHIC
MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE
Plaintiff hereby applies
to this Court for a Temporary Restraining Order, and in support thereof alleges
as follows:
I
By this reference,
plaintiff hereby incorporates the allegations contained in its Complaint for
Injunctive and Other relief filed concurrently herewith.
II
To date, plaintiff had
advanced, pursuant to its bond obligations, the sum of $ to unpaid material
suppliers and subcontractors of Insolvent Construction Company (‘Insolvent’).
Based upon a review of Insolvent’s books and records, and further based upon
numerous notices of claims received from material suppliers and subcontractors,
plaintiff justifiably fears that further substantial advances will be required
and, accordingly, estimates its losses, upon bonds issued for Insolvent, in the
sum of $
III
By virtue of the General
Indemnity Agreement executed by plaintiff and defendants on or about
___________, ______, a copy of which was attached to the complaint as Exhibit
‘A,’ and by virtue of the equitable doctrines of exoneration and quia timet,
plaintiff is entitled to be fully collateralized by defendants prior to making
further payments upon its bonds issued for Insolvent.
IV
Unless restrained and
enjoined therefrom, defendants are likely to sell, transfer, dispose, lien,
secrete or otherwise divert their assets from being used to discharge
defendants’ obligations to exonerate and indemnify plaintiff, all to plaintiffs
irreparable harm.
V
Should notice of the
pending issuance hereof be given to defendants, there exists a strong likelihood
that they will commit one or more of the above acts before this order could be
entered and served upon them, and immediate and irreparable loss, damage and
harm would thereby result to plaintiff.
WHEREFORE, plaintiff
requests that this Court issue an ex parte temporary restraining order which
includes the following:
A. Enjoins and restrains
defendants from selling, transferring, disposing or liening their assets and
property and further enjoins and restrains defendants from allowing their assets
and property to be liened during the pendency of this order;
B. Grants a lien in
favor of plaintiff upon all assets and property of defendants, including realty,
personally and mixed, owned by defendants and property in which defendants have
an interest. Such lien shall secure plaintiff against any loss that it may
sustain or incur by virtue of its having executed bonds for Insolvent. Such lien
shall remain in effect during the pendency of this order; and
C. Requires defendants
to appear within 10 days and show cause why said temporary restraining order
should not remain in effect as a preliminary injunction pending disposition of
this lawsuit.
Respectfully submitted
this ____ day of ___________, 19 ____. |
