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Fucich Contracting, Inc. v. Shread-Kuyrkendall and Associates, Inc.

United States District Court, E.D. Louisiana

April 19, 2019

FUCICH CONTRACTING, INC.
v.
SHREAD-KUYRKENDALL AND ASSOCIATES, INC., et al.

         SECTION M (4)

          ORDER & REASONS

          BARRY W. ASHE, UNITED STATES DISTRICT JUDGE

         Before the Court is a motion for preliminary injunction filed on behalf of Travelers Casualty & Surety Company of America (“Travelers”) against Clayton Fucich, Kathleen Fucich, and Fucich Contracting, Inc. (“FCI”) (collectively “Indemnitors”) to enforce its right to collateral under an indemnity agreement.[1] In preparation for a hearing on Travelers' motion as well as FCI's and the Indemnitors' own reciprocal motions for preliminary injunction, [2] Travelers filed a memorandum in support of its motion, [3] and the Indemnitors filed a memorandum in opposition.[4]The Court held an evidentiary hearing on the cross-motions for preliminary injunction on January 11, 2019.[5] Having considered the parties' memoranda, the evidence (including exhibits and testimony), argument presented at the hearing, and the applicable law, the Court issues this Order & Reasons.

         I. BACKGROUND

         On or about December 22, 2016, FCI entered into a construction contract with the St. Bernard Parish Government (“Parish”) to be the general contractor for the public works improvement project known as the Lake Borgne Basin Levee District Pump Station #1 and #4 Pump Upgrade (“Project”).[6] The general scope of work for the Project consisted of replacing the engines and right-angle gear reducers that drive four backup storm water drainage pumps.[7] In connection with the Project, FCI furnished a payment and performance bond (“Bond”) in the amount of $5, 009, 908.00, underwritten by Travelers.[8] As a condition precedent of Travelers' agreement to issue bonds to FCI for various projects, Travelers required FCI to sign a General Agreement of Indemnity (“Indemnity Agreement”).[9] The Indemnity Agreement provides Travelers the right to demand that FCI deposit collateral security for any “Loss” or “anticipated Loss”:

5. Collateral Security: Indemnitors agree to deposit with [Travelers], upon demand, an amount as determined by [Travelers] sufficient to discharge any Loss or anticipated Loss. Indemnitors further agree to deposit with [Travelers], upon demand, an amount equal to the value of any assets or Contract funds improperly diverted by any Indemnitor. Sums deposited with [Travelers] pursuant to this paragraph may be used by [Travelers] to pay such claim or be held by [Travelers] as collateral security against any Loss or unpaid premium on any Bond. [Travelers] shall have no duty to invest, or provide interest on, the deposit. Indemnitors agree that [Travelers] would suffer irreparable damage and would not have an adequate remedy at law if Indemnitors fail to comply with the provisions of this paragraph.[10]

         The Indemnity Agreement also provides Travelers the right to indemnification from “Loss”:

3. Indemnification and Hold Harmless: Indemnitors shall exonerate, indemnify and save [Travelers] harmless from and against all Loss. An itemized, sworn statement by an employee of [Travelers], or other evidence of payment, shall be prima facie evidence of the propriety, amount and existence of Indemnitors' liability. Amounts due to [Travelers] shall be payable upon demand.[11]

         The Indemnity Agreement defines “Loss” as:

All loss and expense of any kind or nature, including attorneys' and other professional fees, which [Travelers] incurs in connection with any Bond or this Agreement, including but not limited to all loss and expense incurred by reason of [Traveler's]: (a) making any investigation in connection with any Bond; (b) prosecuting or defending any action in connection with any Bond; (c) obtaining the release of any Bond; (d) recovering or attempting to recover Property in connection with any Bond or this Agreement; (e) enforcing by litigation or otherwise any provision of this Agreement; and (f) all interest accruing thereon at the maximum legal rate.[12]

         Furthermore, in the event of a default of the Indemnity Agreement, which includes “a declaration of Contract default by any Obligee, ” and “[Travelers'] good faith establishment of a reserve, ” Travelers may invoke certain specified “Remedies” against the Indemnitors.[13]

         On October 26, 2017, FCI alleges its crew discovered a design defect in the engines supplied for the Project that made them incompatible with the gears.[14] When the Parish refused to pay FCI, FCI filed suit against the Parish and the Parish's engineer, seeking to recover unpaid contract balances owed to FCI for work performed on the Project and other damages.[15] On July 20, 2018, the Parish, by a letter signed by David C. Jarrell, terminated FCI's contract for FCI's failure to perform and made a formal demand upon Travelers to respond under the Bond.[16] FCI denied fault on the basis of the design defect.[17] Travelers came to the same conclusion, based upon its independent review, and rejected the Parish's demand on August 10, 2018.[18] As a result, the Parish filed suit against Travelers on September 5, 2018, for the penal sum of the Bond, $5, 009, 908.00.[19]

         All parties have engaged in settlement negotiations, but FCI has refused to participate on some occasions.[20] In October 2018, Travelers filed a UCC statement relating to the Indemnitors. On November 12, 2018, Travelers made formal demand upon the Indemnitors to deposit collateral in the amount of $5, 036, 878.49, representing the penal sum of the Bond and Travelers' costs and attorney's fees through that date.[21] The formal demand explained that “[FCI's] recent refusal to participate in discussions regarding the work that remains to be performed on the Project and [FCI's] uncompromising refusal to participate in a formal Settlement Conference with the other parties and the Magistrate [Judge] indicate to Travelers that [FCI] does not intend to act in a manner that mitigates the risk and/or minimizes the risk to Travelers and/or itself.”[22] Travelers stated that FCI was in default of the Indemnity Agreement under the provisions that defined default as “a declaration of Default by any Obligee” and “[Travelers'] good faith establishment of any reserve.” “As a consequence of this development, ” Travelers invoked the collateral security clause of the Indemnity Agreement to demand that the Indemnitors deposit collateral, and it asserted other rights under various provisions of the Indemnity Agreement, including the claim settlement provision.[23] After the Indemnitors informed Travelers that it did not have the Indemnity Agreement, Travelers sent a copy to their counsel and granted the Indemnitors an extension to December 3, 2018, to make payment.[24] To date, the Indemnitors have not deposited any collateral with Travelers.[25]

         II. PENDING MOTIONS

         Travelers seeks a preliminary injunction to enforce the collateral security provision of the Indemnity Agreement against the Indemnitors.[26] Travelers claims that it has incurred and continues to incur costs and attorney's fees in relation to the Parish's claim under the Bond that FCI must indemnify and hold harmless under the indemnification provision.[27] Travelers argues that it is substantially likely to succeed on the merits of its demand for collateral because the clear and unambiguous language of the valid contract between it and FCI gives it the “right to be collateralized, on demand, in an amount as determined by Travelers sufficient to discharge any Loss or anticipated Loss incurred by reason of having issued the Bonds.”[28] Travelers contends that the right to demand collateral is triggered by a claim made on the Bond and not FCI's default under the Bond or Indemnity Agreement.[29] Travelers also says the Indemnitors stipulated to irreparable harm in the collateral security provision of the Indemnity Agreement, which states in pertinent part: “[Travelers] would suffer irreparable damage and would not have an adequate remedy at law if Indemnitors fail to comply with the provisions of this paragraph.”[30] Additionally, Travelers argues that the right to collateralization is meaningless if not enforced before judgment.[31]

         In opposition, [32] FCI essentially contends that it is not in default as defined by the Indemnity Agreement, so Travelers cannot enforce the collateral security and indemnity provisions; that Travelers breached the Indemnity Agreement in bad faith by demanding an arbitrarily high amount of collateral far exceeding what is “sufficient to discharge any Loss or anticipated Loss” as permitted under the Indemnity Agreement; and that Travelers breached the Bond in bad faith.[33]The Indemnitors deny that a collateral security provision may, standing alone, create irreparable harm sufficient for the issuance of a preliminary injunction.[34] Rather, FCI contends that Travelers must show evidence that the Indemnitors are bankrupt or in dire financial straits. Otherwise, says the Indemnitors, a collateral security provision is properly enforced through the remedy of specific performance upon judgment after a trial on the merits.[35]

         III. LAW & ANALYSIS

         A. Preliminary Injunction Standard

         A movant seeking a preliminary injunction must establish (1) a substantial likelihood that the it will prevail on the merits; (2) a substantial threat the movant will suffer irreparable injury if the injunction is not granted; (3) that the threatened injury to the movant if the injunction is denied outweighs the potential harm to the non-movant if the injunction is granted; and (4) that granting the injunction will not disserve the public interest. Garcia v. Jones, 910 F.3d 188, 190 (5th Cir. 2018). “A preliminary injunction is an extraordinary remedy which courts grant only if the movant has clearly carried the burden as to all four elements.” Guy Carpenter & Co. v. Provenzale, 334 F.3d 459, 464 (5th Cir. 2003). A preliminary injunction “may only be awarded upon a clear showing that the [movant] is entitled to such relief, ” Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 24 (2008), and is never awarded as a matter of right but only within the sound discretion of the district court. Munaf v. Geren, 553 U.S. 674, 689-90 (2008) (citation omitted); Miss. Power & Light Co. v. United Gas Pipe Line Co., 760 F.2d 618, 621 (5th Cir. 1985). “The purpose of a preliminary injunction is merely to preserve the relative positions of the parties until a trial on the merits can be held.” University of Tex. v. Camensich, 451 U.S. 390, 395 (1981); see Atwood Turnkey Drilling, Inc. v. Petroleo Brasilerio, S.A., 875 F.2d 1174, 1178 (5th Cir. 1989). Ultimately, granting a preliminary injunction “is the exception rather than the rule.” Miss. Power & Light Co., 760 F.2d at 621.

         Generally, a federal court does not render a final judgment on the merits at the preliminary injunction stage; and when it does not render a final judgment, its findings of fact and conclusions of law are not binding at a trial on the merits. Camensich, 451 U.S. at 395. Additionally, “at the preliminary injunction stage, the procedures in the district court are less formal, and the district court may rely on otherwise inadmissible evidence, including hearsay evidence. Thus, the district court can accept evidence in the form of deposition transcripts and affidavits.” Sierra Club, Lone Star Chapter v. F.D.I.C., 992 F.2d 545, 551 (5th Cir. 1993).

         B. Substantial Likelihood of Success on the Merits

         “To show a likelihood of success, the plaintiff must present a prima facie case, but need not prove that he is entitled to summary judgment.” Daniels Health Scis., L.L.C. v. Vascular Health Scis., L.L.C., 710 F.3d 579, 582 (5th Cir. 2013). A preliminary injunction should not issue if “the law on the question at the heart of the dispute does not favor [the movant's] position.” La Union Del Pueblo Entero v. Fed. Emergency Mgmt. Agency, 608 F.3d 217, 225 (5th Cir. 2010).

         1. Choice of Law

          The parties dispute what state law applies in this diversity, breach-of-contract case.[36] A federal court exercising diversity subject-matter jurisdiction applies the choice-of-law rules of the state in which it sits to determine which substantive law will apply. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 498-97 (1941). Thus, this Court will apply Louisiana's choice-of-law rules.

         The parties' claims arise under the Indemnity Agreement and the Bond. Louisiana's general choice-of-law rule applicable to conventional obligations provides:

Except as otherwise provided in this Title, an issue of conventional obligations is governed by the law of the state whose policies would be most seriously impaired if its law were not applied to that issue.
That state is determined by evaluating the strength and pertinence of the relevant policies of the involved states in the light of: (1) the pertinent contacts of each state to the parties and the transaction, including the place of negotiation, formation, and performance of the contract, the location of the object of the contract, and the place of domicile, habitual residence, or business of the parties; (2) the nature, type, and purpose of the contract; and (3) the policies referred to in [Louisiana Civil Code] Article 3515, as well as the policies of facilitating the orderly planning of transactions, of promoting multistate commercial intercourse, and of protecting one party from undue imposition by the other.

La. Civ. Code art. 3537. Article 3515, the general choice-of-law rule for all cases, provides:

Except as otherwise provided in this Book [on conflict of laws], an issue in a case having contacts with other states is governed by the law of the state whose policies would be most seriously impaired if its law were not applied to that issue.
That state is determined by evaluating the strength and pertinence of the relevant policies of all involved states in the light of: (1) the relationship of each state to the parties and the dispute; and (2) the policies and needs of the interstate and international systems, including the policies of upholding the justified expectations of parties and of minimizing the adverse consequences that might follow from subjecting a party to the law of more than one state.

         However, when a contract specifies the applicable law, the contract is “governed by the law expressly chosen or clearly relied upon by the parties, except to the extent that law contravenes the public policy of the state whose law would otherwise be applicable under Article 3537.” La. Civ. Code art. 3540. The parties may choose the law of any state, regardless of whether “that state has a particular factual, geographical, or legal relationship with the contract” subject to the limitation that the chosen law must not contravene “the public policy of the state whose law would have been applicable to the issue ‘but for' the parties' choice.” Id. at revision cmt. f.

         Here, neither the Indemnity Agreement nor the Bond contains an express choice-of-law provision or signals clear reliance on a particular state's law as contemplated by Civil Code article 3540. Therefore, the Court conducts the impairment analysis described in articles 3537 and 3515.

         Travelers is a corporation organized under the laws of Connecticut with its principal place of business in Connecticut. FCI is a corporation organized under the laws of Mississippi with its principal place of business in Mississippi. FCI is licensed to do business in both Mississippi and Louisiana. Clayton and Kathleen Fucich are Mississippi citizens.[37] To secure a public works construction bid in Louisiana such as the flood-protection Project here, the Louisiana Public Works Act requires that bidders furnish a payment bond in the event of their default. La. R.S. 38:2241; Avallone Architectural Specialties, L.L.C. v. DBCS Corp., 839 So.2d 1045, 1048 (La.App. 2003). Accordingly, the Parish required each bidder on the Project to supply a payment bond in the amount of the Project's cost of completion.[38] To bid on the Project, FCI contracted with Travelers to issue the Bond, a typical payment and performance bond. The Bond requires Travelers to act as surety for the Parish by paying or arranging for the completion of the Project in the event of FCI's default. Essentially, the Bond's purpose is to provide security to ensure the completion of the Project.[39] In exchange for Travelers' issuance of the Bond, the Indemnity Agreement obligates FCI to indemnify, provide collateral to, and assign litigation rights to Travelers, among other things. Thus, the Indemnity Agreement's purpose is to make Travelers whole if FCI fails to perform its contract with the Parish, thereby triggering Travelers' surety obligations under the Bond.[40] While the Indemnity Agreement was signed by the Indemnitors in Mississippi, the underlying object of the Indemnity Agreement and the Bond is to ensure completion of the Project in Louisiana.[41] The contract for the Project was executed by FCI in Mississippi and by the Parish in Louisiana, but the Project and performance of the contract were to be completed in Louisiana, and the contract contemplated the application of Louisiana law, including the Louisiana Public Works Act.[42]

         Notwithstanding the Mississippi contacts, Louisiana's interest in enforcing contracts governed by the Louisiana Public Works Act for a public construction in Louisiana outweighs Mississippi's interest in this case. Louisiana citizens of the Parish have a strong interest in the enforcement of both bonds and indemnity agreements that secure the performance of public construction projects in their region, such as the replacement of engines and gear reducers on storm water drainage pumps designed to protect the Parish and its citizens against flooding. Louisiana's law and policies aimed toward ensuring the financial integrity and completion of public works projects would be most impaired if its law were not applied in construing and enforcing the Bond and Indemnity Agreement securing performance of the contract between FCI and the Parish for the Project. Therefore, the Court applies Louisiana law.

         2. Demand for Collateral

         Under Louisiana law, the general rules of contract interpretation apply to indemnity agreements. Sovereign Ins. Co. v. Tex. Pipe Line Co., 488 So.2d 982, 985 (La. 1986). A contract is the law between the parties, and the court must give the contract its legal effect according to the parties' common intent. Sanders v. Ashland Oil, Inc., 696 So.2d 1031, 1036 (La.App. 1997). This intent is to be determined by the words of the contract when they are “clear and explicit and lead to no absurd consequences.” La. Civ. Code arts. 2045, 2046; Sanders, 696 So.2d at 1036. “The rules of interpretation establish that, when a clause in a contract is clear and unambiguous, the letter of that clause should not be disregarded under the pretext of pursuing its spirit.” Sanders, 696 So.2d at 1036 (citing La. Civ. Code art. 2046 cmt. b; Cashio v. Shoriak, 481 So.2d 1013, 1015 (La. 1986)) (other citations omitted). “Each provision … must be interpreted in light of the other provisions so that each is given the meaning suggested by the contract as a whole.” La. Civ. Code art. 2050. “A doubtful provision must be interpreted in light of the nature of the contract, equity, usages, the conduct of the parties before and after the formation of the contract, and of other contracts of a like nature between the same parties.” Id. art. 2053. “Usage, as intended in the preceding articles, is a practice regularly observed in affairs of a nature identical or similar to the object of a contract subject to interpretation.” Id. art. 2055.

         The collateral security provision of the Indemnity Agreement is unambiguous, and the parties do not contend otherwise. Nor do the parties dispute that FCI has an obligation to indemnify Travelers for loss incurred with respect to Travelers' defense of the Parish's claim under the Bond, which is clearly and unambiguously set forth in Section 3.[43] Rather, the parties mainly dispute what triggers Travelers' ability to make a collateral demand under Section 5 (the collateral security provision) and how much Travelers can demand. The Indemnitors contend that Travelers' demand is improper for two main reasons: first, that there was no valid default of the Bond to trigger Travelers' obligation to pay the Parish, and second, that Travelers acted in bad faith to fulfill its obligations under the Bond and Indemnity Agreement.[44] Travelers disagrees, contending that demand may be made “the minute a claim is made under the Bond, ” which occurred on July 20, 2018, when the Parish sent Travelers a letter stating that the Parish terminated FCI from the Project and making formal demand on the Bond.[45] Travelers further argues that its denial to pay the Parish under the Bond and FCI's ultimate liability are immaterial here because the purpose of the collateral security provision is pre-judgment protection from risk of loss. The amount demanded was not arbitrarily or purposefully chosen to compel FCI to accept a pricey settlement, says Travelers, but was based on the potential damages Travelers may face and the attorney's fees and costs it has incurred or may incur.[46]

         Section 5 provides in part: “Indemnitors agree to deposit with [Travelers], upon demand, an amount as determined by [Travelers] sufficient to discharge any Loss or anticipated Loss.”[47] Thus, the collateral security provision delimits what Travelers may demand - “an amount as determined by [Travelers] sufficient to discharge any Loss or anticipated Loss” - and when Travelers may demand it - anytime a demand or claim is made for “any Loss or anticipated Loss.” “Loss” is defined broadly in the Indemnity Agreement as “[a]ll loss and expense of any kind or nature, including attorneys' and other professional fees, which [Travelers] incurs in connection with any Bond or this Agreement, including but not limited to all loss and expense incurred by reason of [Travelers']: … (b) prosecuting or defending any action in connection with any Bond; … (e) enforcing by litigation or otherwise any provision of this Agreement; and (f) all interest accruing thereon at the maximum legal rate.”[48] Applying this broad definition of loss to what Travelers may demand under Section 5, it is clear that Travelers may demand payment for an expansive range of debts, including monies it could expend in completing the Project or in responding to the Parish's lawsuit or its demand against Travelers under the Bond. “Anticipated Loss” is not defined in the contract, but, by its plain language, “anticipated Loss” must mean future loss, future monies expended in completing the Project, and future damages and attorney's fees. This conclusion is reinforced by the purpose of collateral security provisions in indemnity agreements: to protect the surety against uncertain future loss. See Emp'rs Mut. Cas. Co. v. Precision Constr. & Maintenance, LLC, 2015 WL 5254706, at *7-8 (E.D. La. Sept. 8, 2015). The contractual provision expressly protects the surety from experiencing post-judgment uncertainty by providing pre-judgment security. There is no requirement, in the contract or in case law, that the surety must prove the principal's actual liability, which would defeat one purpose of the collateral security provision. See id.

         The court in Travelers Casualty & Surety Company of America v. Padron, 2017 WL 9360906, at *8 (W.D. Tex. Aug. 2, 2017), analyzed an identical collateral security provision. There, Travelers sought a preliminary injunction to force the indemnitors under an indemnity agreement that secured performance and payment bonds to deposit collateral security for recoverable and incurred losses of $6.6 million and roughly $12.7 million of anticipated loss in relation to bond claims. Id. at *1-3, *5. The court reasoned that Travelers satisfied the likelihood-of-success-on-the-merits prong of the preliminary injunction analysis because “(1) such a provision is intended to secure collateral prior to loss and to avoid loss, even if only temporarily, and (2) specific performance is the only available remedy.” Id. at *8. The Court agrees with this rationale.[49]

         Travelers' inartful November 12, 2018 demand letter to FCI may have caused FCI to believe wrongly that a default was necessary before Travelers could demand collateral. But the Indemnity Agreement does not impose such a prerequisite. Instead, Travelers' recourse under the collateral security provision is distinct from the “Remedies” (Section 6 of the Indemnity Agreement) that Travelers may only invoke “[i]n the event of a Default.”[50] Therefore, to demand collateral under the collateral security provision, it is unnecessary for Travelers to establish that a default has occurred under either the Bond or the Indemnity Agreement.[51]

         FCI also claims that the collateral security provision is unenforceable because Travelers breached its obligations under the Bond and the Indemnity Agreement in bad faith. Specifically, FCI contends that Travelers' demand was made in bad faith because: (1) Travelers denied the Parish's claim under the Bond after having itself concluded that FCI is not at fault, rendering its $5 million demand for collateral an unreasonable estimate of loss presumably chosen only to force FCI to settle; (2) Travelers admitted it has not yet established a reserve; and (3) Travelers acted in bad faith by communicating to the Parish about FCI's nonperformance.[52]

         a. Amount of Demand

         The Indemnity Agreement permits demand of “an amount as determined by [Travelers] sufficient to discharge any Loss or anticipated Loss.” While Travelers may plainly exercise discretion to determine the amount, its discretion is limited to the determination of an amount “sufficient to discharge any Loss or anticipated Loss.” “Sufficient” means “of a quantity, extent, or scope adequate to a certain purpose or object, ” or “to provide the needs or accommodation of, to satisfy.” The Oxford English Dictionary (2019). A sufficient amount would therefore be one to accommodate the scope of Travelers' loss and anticipated loss - the monies it expects to expend to complete the Project as well as the attorney's fees and damages it has incurred or may incur in response to the Parish's claim under the Bond. Although the word “sufficient” is not the same as “reasonable, ” the use of the adjective “sufficient” in this context implies a similar limitation, where the amount is reasonably related to Travelers' loss or anticipated loss. Cf. Cincinnati Ins. Co. v. Savarino Constr. Corp., ...


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