IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEBRASKA

ALLIED WORLD SPECIALTY

INSURANCE COMPANY,

Plaintiff,

vs.

ABAT LEREW CONSTRUCTION, LLC,

ABAT LEREW, LLC, MICHAEL R. FORD,

and NOEL A. FORD,

Defendants.

8:16CV545

MEMORANDUM AND ORDER

This matter is before the court on the plaintiff Allied World Specialty Insurance

Company’s (“Allied”) motion for a preliminary injunction, Filing No. 2. This is an action

on an indemnity agreement. Jurisdiction is based on diversity of citizenship under 28

U.S.C. § 1332.

I. BACKGROUND

In its complaint, Allied asserts claims for breach of contract, specific

performance, and exoneration and quia timet.

It seeks specific performance of the

Indemnitors’ (ALC’s) obligation to deposit collateral security in an amount sufficient to

discharge the claims that have been asserted against Allied on a payment and

performance surety bond. Defendants Abat Lerew Construction, LLC, Abat Lerew, LLC,

“Literally meaning ‘because he fears,’ quia timet is ‘[a] legal doctrine that allows a person to

seek equitable relief from a future probable harm to a specific right or interest.’” Pennsylvania Nat. Mut.

Cas. Ins. Co. v. City of Pine Bluff, 354 F.3d 945, 950 n.4 (8th Cir. 2004). “‘Quia timet is the right of a

surety to demand that the principal place the surety “in funds” when there are reasonable grounds to

believe that the surety will suffer a loss in the future because the principal is likely to default on its primary

obligation to the creditor.’” In re Farmland Indus., Inc., 296 B.R. 793, 797 n.1 (B.A.P. 8th Cir. 2003)

(quoting Borey v. Nat'l Union Fire Ins. Co., 934 F.2d 30, 32 (2d Cir. 1991)). “Exoneration, though closely

related, is distinct. It is the surety's right, after the principal's debt has matured, to compel the principal to

honor its obligation to the creditor.” Id. (quoting Borey, 934 F.2d at 32-33).

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Michael R. Ford, and Noel A. Ford (collectively, “ALC”) generally deny the plaintiff’s

allegations and assert equitable defenses of estoppel and unclean hands. ALC also

affirmatively alleges that Allied has breached its obligation of good faith and fair dealing.

Further, it alleges that portions of the Indemnity Agreement are void as against public

policy or otherwise legally unenforceable.

ALC is a general contractor. It entered into ten public construction contracts to

perform general contracting services for various projects and obtained payment and

performance surety bonds from Allied. Eight of the ten projects have been completed

and two are temporarily shut down due to seasonal conditions. ALC and Allied also

entered into an indemnity agreement.

In its complaint, Allied states that, in accordance with the law and contracts for

the projects, it issued, as surety, Payment Bond and Performance Bond No. S001-2203

in the maximum penal sum of $1,677,772 on behalf of ALC, as principal, and naming

the United States of America as the Obligee (the “Bond”). Filing No. 1, Complaint at 2-

3. It alleges it has received bond claims for over $300,000. Id. at 4. On November 15,

2016, it demanded that ALC provide $400,000 in collateral security pursuant to the

Agreement of Indemnity. Id. The indemnity agreement obligates ALC

to indemnify and to hold the Surety harmless from and against any and all

liability for any and all Loss, and in such connection, Indemnitors will pay

the Surety for all Losses specified or otherwise described in Surety's

notice, no later than close of business on the Due Date with respect to

such notice, whether or not the Surety has actually made any payment

thereon as of such Due Date.

Filing No. 1-1, Complaint, Ex. A, Indemnity Agreement at 3. The Indemnity Agreement

further requires ALC “to deposit with [Allied] as collateral, by the Due Date and after

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receipt of [Allied’s] written demand, the sum equal to an amount determined by [Allied],

to cover liability for Loss . . . as determined by [Allied].” Filing No. 1-1, Complaint, Ex. A.

Allied seeks an injunction ordering ALC to post collateral security with Allied

World in the amount of $400,000, enjoining and restraining ALC from selling,

transferring, disposing of or liening their assets and property, granting a lien on ALC’s

property until such collateral is deposited, requiring ALC to indemnify and exonerate

Allied for all liabilities, losses, and expenses incurred by Allied World as a result of Allied

World having executed the Bonds, and providing Allied access to ALC’s books and

records. It also seeks an order requiring ALC to pay Allied’s reasonable attorneys’ fees

and costs.

In support of its motion, Allied submits the bond, the indemnity agreement, its

demand for collateral, and the affidavit of James A. Keating, Assistant Vice President of

Surety Claims for Allied (“Keating Aff.”). Filing No. 4, Index of Evid., Exs. 1-4. Keating

states that Allied has received claims on the bond and is investigating them in order to

discharge its obligations. Filing No. 4-4, Keating Aff. at 5. He also states Allied has

incurred and continues to incur attorney fees, costs, and expenses associated with the

investigation and litigation of the Bond Claims. Id. at 6 Further, he states that Allied

has made a demand on ALC for collateral security under the indemnity agreement, but

“the Indemnitors have failed, despite [Allied's] demand, to fully and satisfactorily

respond to and resolve the pending Bond claims, indemnify or exonerate [Allied], and

post collateral.” Id.

In response to Allied’s motion for a preliminary injunction, ALC challenges at

least one of the bond claims as wholly without merit and asserts that it has not received

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final payment on one of the projects because Allied has wrongfully refused to provide its

consent. Filing No. 25-1, Declaration of Michael D. Ford at 2-3. Ford states ALC is

making every effort to resolve the bond claims in order to fully perform its legitimate

obligations under the indemnity agreement. Id. at 3-4. Ford contends Allied has not

paid on the bond claims and any harm to Allied is speculative at this point. Id. at 4.

Further, Ford states that the defendants are not absconding with money or transferring,

disposing of, or dissipating assets to avoid paying the bond claims or to avoid

obligations under the indemnity agreement. Id. at 3.

In its brief, ALC does not dispute that it has a duty under the agreement to

indemnify Allied for legitimate losses, but contends the relief requested—specific

performance with respect to providing collateral security—is excessive and does not

correspond with the actual potential liability from the bond claims. Also, it argues that

Allied has failed to show a probability of success on the merits because ALC has raised

the legitimate defenses of unclean hands and equitable estoppel.

II. LAW

When evaluating whether to grant the extraordinary relief of a preliminary

injunction, a district court should consider four factors: (1) the threat of irreparable harm

to the movant; (2) the state of the balance between this harm and the injury that

granting the injunction will inflict on other parties; (3) the probability that the movant will

succeed on the merits; and (4) the public interest. Dataphase Sys., Inc. v. C L Sys.,

Inc., 640 F.2d 109, 114 (8th Cir. 1981) (en banc); Roudachevski v. All-American Care

Centers, Inc., 648 F.3d 701, 705 (8th Cir. 2011). A preliminary injunction is an

extraordinary remedy and the burden of establishing the propriety of an injunction is on

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the movant. Roudachevski, 648 F.3d at 701, 705 (8th Cir. 2011). The burden on a

movant to demonstrate that a preliminary injunction is warranted is heavier when

granting the preliminary injunction will in effect give the movant substantially the relief it

would obtain after a trial on the merits. Calvin Klein Cosmetics Corp. v. Lenox Lab., 815

F.2d 500, 503 (8th Cir. 1987).

No single factor is determinative, although the failure to demonstrate the threat of

irreparable harm is, by itself, a sufficient ground upon which to deny a preliminary

injunction. See Adam-Mellang v. Apartment Search, Inc., 96 F.3d 297, 299 (8th Cir.

1996); see also Modern Computer Sys., Inc. v. Modern Banking Sys., Inc., 871 F.2d

734, 738 (8th Cir. 1989) (en banc); Roudachevski, 648 F.3d at 706 (stating the threat of

irreparable harm is a necessity in proving the propriety of preliminary injunctive relief).

To succeed in demonstrating a threat of irreparable harm, “a party must show that the

harm is certain and great and of such imminence that there is a clear and present need

for equitable relief.” Id. (quoting Iowa Utils. Bd. v. Fed. Commc’ns Comm’n, 109 F.3d

418, 425 (8th Cir. 1996)). “[A]n injury is ‘irreparable’ only if it cannot be undone through

monetary remedies.” Snook v. Trust Co. of Ga. Bank of Savannah, N.A., 909 F.2d 480,

487 (11th Cir. 1990).

A showing of irreparable harm does not automatically mandate a ruling in the

plaintiff’s favor; the court must proceed to balance the harm to the defendant in granting

the injunction. Hill v. Xyquad, Inc., 939 F.2d 627, 630-31 (8th Cir. 1991). Also,

although success on the merits has been referred to as the most important of the four

factors, it is insufficient on its own. Roudachevski, 648 F.3d at 706.

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Under Nebraska law, in order to recover in an action for breach of contract, the

plaintiff must plead and prove the existence of a promise, its breach, damage, and

compliance with any conditions precedent that activate the defendant's duty.

Henriksen v. Gleason, 643 N.W.2d 652, 658 (2002). To recover under a theory of quia

timet or exoneration, a surety must establish that the debt is presently due (exoneration)

or will come due (quia timet), that the principal is or will be liable for the debt, and, that

absent equitable relief, the surety will be prejudiced because it will be forced to advance

the money to the creditor. In re Farmland Indus., Inc., 296 B.R. 793, 797 n.1 (B.A.P. 8th

Cir. 2003).

Specific performance is an appropriate remedy only under certain circumstances.

Tierney v. Four H Land Co. Ltd. P'ship, 852 N.W.2d 292, 298 (Neb. 2014). It may be

granted only where there is a valid, legally enforceable contract, and the party seeking

specific performance has substantially complied with the terms of that contract. Id.

Also, “[t]here must be no adequate remedy at law for breach of the relevant contract.”

Id at 299.

There is some authority for the proposition that when a surety has demanded

that a principal post collateral security and the principal refused, the legal remedy of

damages is not adequate. See Liberty Mut. Ins. Co. v. Aventura Eng'g & Const. Corp.,

534 F. Supp. 2d 1290, 1321 (S.D. Fla. 2008) (stating “a surety's loss of its right to

collateralization cannot be adequately remedied through monetary damages”); Fid. &

Deposit Co. v. D.M. Ward Constr. Co., Inc., No. 06–2483–CM, 2008 WL 2761314 at *2

(D. Kan. July 14, 2008) (same); U.S. Sur. Co. v. Stevens Family Ltd. P'ship, 905 F.

Supp. 2d 854, 859 (N.D. Ill. 2012) (stating “[w]hile the breach of such a collateral

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security provision cannot be rectified through the traditional legal remedy of monetary

reimbursement (remember that a surety will not have suffered an actual loss at the point

where collateralization, as opposed to reimbursement, is appropriate), California courts

have employed the equitable remedy of specific performance to enable sureties to

receive the benefit of their collateral-security bargains”).

Numerous courts have granted summary judgment to sureties for specific

performance of the collateral security obligation and required indemnitors to post

collateral security. See, e.g., Am. Motorists Ins. Co. v. United Furnace Co., 876 F.2d

293, 302 (2d Cir.1989) (granting partial summary judgment on collateral security and

ordering specific performance); Safeco Ins. Co. of Am. v. Lake Asphalt Paving & Const.,

LLC, 807 F. Supp. 2d 820, 827 (E.D. Mo. 2011) (ordering specific performance on a

motion for summary judgment); D.M. Ward Constr. Co., Inc., No. 06–2483–CM, 2008

WL 2761314 at *2 (ordering specific performance on a motion for partial summary

judgment); Emp’rs Mut. Cas. Co. v. JVV Consulting-Constr. Mgmt., L.L.C., No. 11-79-

JJB, 2012 WL 1028607, at *4 (M.D. La. Mar. 26, 2012) (granting summary judgment

and ordering specific performance of right to collateralization); U.S. Fidelity & Guar. Co.

v. Feibus, 15 F. Supp. 2d 579, 588 (M.D. Pa. 1998) (finding defendants failed to raise

an issue of material fact that would prevent the court from entering summary judgment

on plaintiff's claim for specific performance); Liberty Mut. Ins. Co. v. Nat'l Pers. of Texas,

Inc., No. 3:02-CV-1341, 2004 WL 583531, at *2 (N.D. Tex. Mar. 24, 2004) (applying

Texas law and entering summary judgment of specific performance).

A party's entitlement to specific performance is governed by state law, not the

federal standards for granting injunctive relief under Rule 65 of the Federal Rules of

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Civil Procedure. Employers Mut. Cas. Co. v. Precision Const. & Maint., LLC, No. 14-

1420, 2015 WL 5254706, at *10 (E.D. La. Sept. 8, 2015) (noting that courts have

repeatedly granted specific enforcement of collateral security provisions, as long as

specific performance is available under state law). The equitable remedies of specific

performance and preliminary injunction are distinct. Roland Machinery Co. v. Dresser

Industries, Inc., 749 F.2d 380, 386 (7th Cir. 1984) (noting absence of an adequate

remedy at law is a precondition to any form of equitable relief, but such ultimate relief

can easily wait until the end of trial, only if a movant “will suffer irreparable harm—that

is, harm that cannot be prevented or fully rectified by the final judgment after trial—can

he get a preliminary injunction.”) A judgment on the merits is required prior to the

issuance of a decree of specific performance, whereas “the issuance of a preliminary

injunction is procedurally truncated, occurring prior to judgment on the merits, and, for

that reason, it is an extraordinary remedy requiring both the absence of adequate

remedy at law and the clear establishment of the burden of persuasion as to each of the

four prerequisites.” Great Am. Ins. Co. v. Fountain Eng'g, Inc, No. 15-CIV-10068-JLK,

2015 WL 6395283, at *2 (S.D. Fla. Oct. 22, 2015).

“While a surety need not sustain a loss from its own pocket before it can raise a

claim demanding specific enforcement of an indemnity agreement, the fact that the

claim exists does not establish irreparable injury for purposes of injunctive relief.” Ohio

Cas. Ins. Co. v. Campbell's Siding & Windows, No. 1:15-CV-00255-EJL, 2015 WL

6758137, at *3 (D. Idaho Nov. 4, 2015) (citation omitted) (finding surety’s “motion only

seeks injunctive relief to require the payment of collateral security which is an economic

injury and not irreparable”); see Travelers Cas. & Sur. Co. of America v. W.P. Rowland

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Constructors Corp., No. CV-12-0390-PHX-FJM, 2012 WL 1718630, at *3 (D. Ariz. May

15, 2012) (denying injunctive relief of collateralization to a surety); Hudson Insur. Co. v.

Simmons Constr., LLC, No. CV12–407–PHX–GMS, 2012 WL 869383, at *4 (D. Ariz.

March 14, 2012) (finding no authority for preliminary injunctive relief for

collateralization); Hanover Ins. Co. v. TLC Investing, LLC, No. 2:11-CV-00711-JCM-

LRL, 2011 WL 3841299, at *1 (D. Nev. Aug. 26, 2011) (denying reconsideration of a

denial of preliminary injunction based on failure to show irreparable harm).

“Cases discussing preliminary injunctions have held that a preliminary injunction

is warranted to enforce a surety's rights if the principal is insolvent or secreting assets.”

Aventura Eng’g, 534 F. Supp. 2d at 1321–22; see also Travelers Cas. & Sur. Co. v.

Ockerlund, No. 04–C–3963, 2004 WL 1794915, at *5 (N.D. Ill. Aug. 6, 2004) (issuing

preliminary injunction requiring indemnitor to post collateral in the absence of any

defenses or any argument that the indemnity agreement was unenforceable). Courts

granting preliminary injunctive relief under Federal Rule of Civil Procedure 65 generally

require some showing of irreparable harm such as evidence that establishes that the

indemnitor is in dire financial straits, no longer has a traditional source of credit, has

been dishonest or “is millions of dollars in the hole with various creditors.” W. Sur. Co.

v. Futurenet Grp., Inc., No. 16-CV-11055, 2016 WL 3180188, at *7 (E.D. Mich. June 8,

2016) (enjoining the indemnitors, after a hearing, from transferring or encumbering their

assets, but not requiring them to post collateral); Allied World Specialty Ins. Co. v.

Lawson Inv. Grp., Inc., No. 6:15-CV-1397-Orl-37TBS, 2016 WL 695980, at *4 (M.D. Fla.

Feb. 22, 2016) (granting motion for preliminary injunction on a finding that indemnitors

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had filed or sought protection in bankruptcy court and assets were likely to be

dissipated).

A showing that a surety is not likely to incur any damages beyond the economic

cost of paying the bond claims prior to receiving collateral “‘does not support a finding of

irreparable harm, because such injury can be remedied by a damage award.’”

Travelers Cas. & Sur. Co. of Am. v. W.P. Rowland Constructors Corp., No. CV 12-

00390-PHX-FJM, 2012 WL 1718630, at *3 (D. Ariz. May 15, 2012) (quoting Rent–A–

Center, Inc. v. Canyon Television & Appliance Rental, Inc., 944 F.2d 597, 603 (9th Cir.

1991)).

A showing that a surety will suffer extreme or very serious damage that would

justify a mandatory injunction requiring the deposit of collateral would include, for

example, establishing that it does not possess sufficient funds to pay the bond claims or

showing that the injury sustained by the indemnitor’s failure to provide collateral is

incapable of being compensated with money damages. Id. “‘[T]he fact that plaintiff may,

in the interim, be marginally less secure with respect to the availability of a final money

judgment [or decree], does not constitute “irreparable harm” so as to warrant the

extraordinary remedy of a preliminary injunction.’” Great Am. Ins. Co. v. Fountain Eng'g,

Inc., No. 15-CIV-10068-JLK, 2015 WL 6395283, at *3 (S.D. Fla. Oct. 22, 2015) (quoting

Firemen's Ins. Co. v. Keating, 753 F. Supp. 1146, 1157 (S.D.N.Y. 1990)). The purpose

of a collateral security clause is to provide sureties with access to financial cushioning

Although the court denied the motion for preliminary injunction, it later granted the surety's

motion for summary judgment and ordered specific performance in the form of payment of collateral

under the indemnity agreement. Travelers Cas. & Sur. Co. of Am. v. W.P. Rowland Constructors Corp.,

No. CV-12-0390-PHX-FJM, 2013 WL 2285204, at *3 (D. Ariz. May 22, 2013)

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during the pendency of claims and, where violated, the surety suffers ongoing harm in

the form of missing money, but, whatever the loss, whether to financial security or

otherwise, it is monetary in character, and may be adequately remedied by a judgment

on the merits. Id.

III. DISCUSSION

The court finds, at this early stage of the proceedings, the plaintiff has not

established that it is entitled to injunctive relief. Allied has not met the heavy burden it

faces where, as here, granting the preliminary injunction will effectively give it

substantially the relief it would obtain after a trial on the merits. At this juncture, Allied

has not shown it will be irreparably harmed by denial of a injunctive relief. It has not

shown that the defendants are insolvent or disposing of or secreting assets. Moreover,

it concedes that it has not paid out any claims and is in the process of investigating the

claims. Also, the defendant expresses some willingness to resolve the issues and fulfill

its admitted obligations.

Allied conflates the requirement of an “inadequate remedy at law” for the purpose

of an ultimate award of equitable relief with the required showing necessary for a

preliminary injunction—a demonstration that if the injunction is not granted the movant

is likely to suffer irreparable harm before a decision on the merits can be rendered. The

fact that Allied may be ultimately be entitled, under Nebraska law, to the equitable

remedy of specific performance after proving its case, does not mean that an order

granting specific performance is appropriate or necessary at this time. Allied has not

shown that it will be irreparably harmed if an injunction is not granted at this time. It has

not established that it cannot be compensated for the indemnitor’s failure to provide

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collateral with money damages or with an order of specific performance after resolution

of the merits.

In addition, although Allied has shown some probability of success on the merits

of its claims, it has not presented evidence that clearly establishes its legal right to

specific performance at this time. ALC has raised the defenses of equitable estoppel

and unclean hands and challenges the validity of certain provisions of the indemnity

agreement. Whether ALC’s denials or defenses are valid is the ultimate issue in this

case. The fact that sureties can be entitled to the specific performance of valid

collateral security clauses does not mean the provision in this case is substantially likely

to be valid or that ALC’s defenses are insufficient as a matter of law. The cases that

grant specific performance of a collateralization clause generally involve motions for

summary judgment and a full development of the record. Defendants have raised

issues of good faith and inequitable conduct, as well as a public policy argument, that

deserve fuller consideration.

The court also finds the balance of harms favors ALC. It has presented

unrefuted evidence that ALC's financial condition, ability to meet its ongoing financial

obligations, and ability to perform the two presently uncompleted public construction

projects would be put in jeopardy if an injunction were granted and it was required to

deposit $400,000 in collateral security. In contrast, the harm to Allied is that it will lose

the benefit of its bargain and will be required to expend its own funds to resolve the

bond claims. Even conceding that the nature of the injury to a surety is the lack of

collateralization while the claims are pending, Allied has not shown that such injury is

certain and great and so imminent that there is a clear and present need for equitable

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relief.

It does not contend, nor has it shown, that it lacks sufficient funds to investigate

or pay the bond claims or that the injury sustained by the indemnitor’s failure to provide

collateral cannot be compensated with money damages.

The public interest will also be furthered by a denial of preliminary injunctive relief

at this stage of the proceedings. Allied contends that the public interest will be served

by seeing that contractual agreements between parties are upheld and by ensuring the

continued solvency of sureties for the benefit of the public. That may ultimately be true,

but the public interest is not served by issuing the extraordinary relief of a preliminary

injunction before discovery and without adequate development of an indemnitor’s

arguable defenses. Accordingly, the court finds the motion for a preliminary injunction

should be denied at this time, without prejudice to reassertion.

IT IS ORDERED:

1. The plaintiff’s motion for a preliminary injunction (Filing No. 2) is denied,

without prejudice to reassertion.

Dated this 24th day of April, 2017.

BY THE COURT:

s/ Joseph F. Bataillon

Senior United States District Judge

The cases cited by Allied as illustrative of their position on this issue, Emp’rs Mut. Cas. Co.,

2015 WL 5254706, at *10 and Lake Asphalt Paving & Const., LLC, 807 F. Supp. 2d at 827, did not

involve motions for a preliminary injunction but, rather, specific performance of a surety’s right to collateral

security in the context of a motion for summary judgment.

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