United States District Court, N.D. Illinois, Eastern Division
August 5, 2004.
TRAVELERS CASUALTY AND SURETY COMPANY Plaintiff,
CRAIG R. OCKERLUND and SUSAN M. OCKERLUND Defendants.
The opinion of the court was delivered by: PAUL PLUNKETT, Senior District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff seeks a preliminary injunction under Rule 65 of the
Federal Rules of Civil Procedure requiring defendants to post
certain collateral with plaintiff and prohibiting the transfer of
all defendants' assets. For the following reasons, the injunction
is granted in part and denied in part.
Plaintiff issued payment and performance bonds on behalf of
Ockerlund Construction Company ("Ockerlund"), securing
Ockerlund's obligations to perform construction work on various
Illinois public projects in accordance with the Illinois Public
Construction Bond Act, 30 ILCS 550/1 et seq. As a condition for
plaintiff to issue the bonds on Ockerlund's behalf, plaintiff
required that defendants sign an indemnity agreement, agreeing to
indemnify and hold plaintiff harmless from all liability under
the bonds it issues ("Indemnity Agreement"). The Indemnity
Agreement specifically provides:
Indemnitor(s) jointly and severally agree to
indemnify Surety from and against any and all Loss
and to this end Indemnitor(s) promise:
(a) To promptly reimburse Surety for all Loss and it
is agreed that: (1) originals or photocopies of claim
drafts or payment records kept in the ordinary course
of business, including computer print-outs, verified
by affidavit, shall be prima facie evidence of the
fact and amount of such Loss; (2) Surety shall be
entitled to reimbursement for any and all
disbursements made by it in good faith under the
belief that it was liable, or that such disbursement
was necessary or prudent.
(b) To deposit with Surety on demand the amount of
any reserve against Loss which Surety is required or
deems it prudent to establish, whether on account of
an actual liability or one which is, or may be
asserted against it.*fn1
(Compl. Ex. A.) The Indemnity Agreement is signed by defendants
and Ockerlund and dated June 14, 1995. (Compl. Ex. A.)
As of May 11, 2004, plaintiff has been sued and/or received
bond claims totaling $500,000 against the payment and performance
bonds it issued on behalf of Ockerlund. (Mot. Prelim. Inj. Ex.
A.) Plaintiff notified defendants of the bond claims and
requested that defendants post collateral in accordance with the
terms of the Indemnity Agreement. As of May 21, 2004, defendants
had not deposited any collateral with plaintiff. Plaintiff
estimates its exposure under the bonds at $500,000 and has set a
reserve in that amount. (Compl. ¶ 12.) Plaintiff brought suit
against defendants alleging breach of contract and seeking
exoneration, quia timet,*fn2 specific performance of the
Indemnity Agreement and a preliminary injunction. Before us now is plaintiff's motion for a preliminary
injunction. Plaintiff seeks an order requiring defendants to post
collateral in the amount of $500,000, and until that time,
enjoining and restraining defendants from selling, transferring,
disposing or creating a lien on their assets and property and
granting to plaintiff a lien upon all assets and property owned
by defendants and in which defendants have an interest. Plaintiff
also seeks an order requiring defendants to indemnify and
exonerate plaintiff for all liabilities, losses and expenses
incurred by plaintiff as a result of plaintiff having issued the
As a first matter, we must address defendants' argument that
under the Supreme Court decision of Grupo Mexicano de
Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308
(1999), we lack to power to enter an order seizing, freezing or
restraining the use of defendants' property prior to judgment. We
do not agree that the Grupo decision impacts our ability to
grant the relief plaintiff requests under these circumstances.
In Grupo, the Court held that a district court does not have
the power to issue a preliminary injunction preventing a
defendant from transferring assets pending adjudication of a
contract claim for money damages. 527 U.S. at 333. In that case,
the Grupo plaintiffs purchased unsecured notes issued by Grupo
Mexicano de Desarrollo, S.A. ("GMD"), a Mexican holding company.
GMD fell into financial trouble and missed an interest payment on
the notes. The Grupo plaintiffs accelerated the principal
amount due on the notes and sued for the amount due in federal
district court. In their complaint, the Grupo plaintiffs
alleged that "GMD is at risk of insolvency, if not insolvent
already," that GMD was dissipating its most significant asset and
that GMD was preferring its Mexican creditors. Id. at 312. They sought breach of contract damages
and requested a preliminary injunction restraining GMD from
assigning its assets so that it would be able to pay its debts.
The Grupo plaintiffs claimed that without the preliminary
injunction, GMD's actions would frustrate any judgment they could
ultimately obtain. The district court issued a preliminary
injunction restraining GMD from "dissipating, disbursing,
transferring, conveying, encumbering or otherwise distributing or
affecting" its assets. See 527 U.S. at 310-314. The Second
The Supreme Court reversed the Second Circuit and held that the
district court was without the power to grant such a preliminary
injunction. The Court looked to The Judiciary Act of 1789, which
gave the federal courts jurisdiction over all suits in equity,
and reaffirmed its position that the federal courts have the
"authority to administer in equity suits the principles of the
system of judicial remedies which had been devised and was being
administered by the English Court of Chancery at the time of the
separation of the two countries." Id. at 318 (internal
quotations and citation omitted). The Court found that the relief
the Grupo plaintiffs requested was not the kind traditionally
conferred by courts of equity. Finding that the district court
did not have the power to issue the preliminary injunction, the
Court adhered to the established general rule that "a judgment
establishing the debt was necessary before a court of equity
would interfere with the debtor's use of his property."
527 U.S. at 321.
Defendants contend that this case falls squarely under Grupo
because, regardless of how it styles its request for relief,
plaintiff ultimately seeks money from them. But the facts of this
case differ from those of Grupo in significant ways. Plaintiff
here does not seek only money damages; it seeks equitable relief
and that relief is recognized under the law of suretyship. See
Western Cas. & Sur. Co. v. Biggs, 217 F.2d 163, 165 (7th
Cir. 1954) (court of equity will, at surety's request, seize funds due principal if surety can show debts are currently due,
principal is unable to or refuses to pay them and, if they are
not paid, surety will become liable). In addition, plaintiff is
not simply an unsecured creditor of defendants seeking to freeze
defendants' assets before judgment can be obtained. Plaintiff
specifically bargained for a collateral security provision
pursuant to which defendants contractually agreed to post
collateral with plaintiff in the event plaintiff establishes a
reserve against losses and demands such amount from defendants.
Courts have granted specific performance in cases where
indemnitors have failed to comply with collateral security
agreements. See Safeco Ins. Co. v. Schwab, 739 F.2d 431, 433
(9th Cir. 1984); Safeco Ins. Co. v. Dematos Enters., Inc.,
No. 02-C2899, 2003 WL 21293825, at *4 (E.D. Pa. Apr. 10, 2003).
To do otherwise would deny a surety of the security position for
which he specifically bargained. See Safeco Ins. Co.,
739 F.2d at 433.
Defendants also rely on a district court decision in the
Eastern District of Virginia in support of its argument that a
preliminary injunction under these circumstances is
inappropriate. In Travelers Cas. & Sur. Co. v. Beck Dvlp.
Corp., 95 F. Supp. 2d 549 (E.D. Va. 2000), a surety sought an
injunction preventing an indemnitor from spending the life
insurance proceeds of her recently-deceased husband, also an
indemnitor. In denying the motion for a temporary restraining
order, the court applied the two-step analysis articulated by the
Fourth Circuit in United States ex rel. Rahman v. Oncology
Assocs., P.C., 198 F.3d 489 (4th Cir. 1999).*fn3 First,
the court asked whether the plaintiff had an equitable interest in the insurance proceeds. The court
found that the plaintiff did not have such an interest because it
could not demonstrate a nexus "between the ultimate relief sought
and the specific assets in question." Beck,
95 F. Supp. 2d at 554. The indemnity agreement, which contained a collateral
security provision pursuant to which the indemnitors agreed to
pay "an amount sufficient to discharge any claim," was too broad
and the lack of specificity was "fatal to the [p]laintiff's claim
of a direct interest in any identifiable asset." Id. That
essentially ended the court's inquiry. In closing, the court also
said: "the [p]laintiff has asked the Court to order the specific
performance of contractual duties of indemnity, but such duties
involve nothing more than the payment or pledging of money.
Accordingly, specific performance is an improper remedy
generally. . . ." Id.*fn4
We decline to take the position of the Beck court. In that
case, the plaintiff sought proceeds from a life insurance policy,
which the court noted was not something the surety had counted on
when it entered into the indemnity agreement with the defendant.
See Beck, 95 F. Supp. 2d at 554-55. Here, however, plaintiff
has not identified such an asset. It is not unreasonable to
assume that plaintiff examined defendants' entire financial
situation before it entered into the Indemnity Agreement and that
it relied on the information provided by defendants when making
its decision to act as surety on the bonds. (Mot. Prelim. Inj. at
3; Reply Mot. Prelim. Inj. at 8.) We also note that other courts
have found it appropriate to grant a preliminary injunction to
enforce a collateral security provision in an indemnity agreement.*fn5 See
Travelers Cas. & Sur. Co. v. P.B. Verdico, Inc. et al., No.
03-C6985 (N.D. Ill. Nov. 26, 2003) (order granting preliminary
injunction); United States Fidelity & Guaranty Ins. Co. v. Cler
Constr. Servs., Inc., No. 03-C1405, 2003 WL 1873926 (N.D. Ill.
Apr. 11, 2003).
We now move on to the familiar standard governing motions for
preliminary injunctions. In order to grant a preliminary
injunction, we must first find: (1) some likelihood of success on
the merits; (2) no adequate remedy at law; and (3) that the
plaintiff will suffer irreparable harm if the injunction is not
granted. Abbott Labs. v. Mead Johnson & Co., 971 F.2d 6, 11
(7th Cir. 1992). If these three conditions are met, we then
consider: (1) the harm to defendants if the injunction is
granted, weighed against the harm to plaintiff if the injunction
is denied; and (2) the public interest, i.e. the consequences
to non-parties of granting or denying the injunction. Id. at
As for the first prong, plaintiff need only show that it has a
"better than negligible" chance of success on the merits of its
claim. See Platinum Home Mortgage Corp. v. Platinum Fin. Group,
Inc., 149 F.3d 722, 726 (7th Cir. 1998). We find that it has
made this showing. Under paragraph 2 of the Indemnity Agreement,
defendants have agreed to "deposit with Surety on demand the
amount of any reserve against Loss which Surety is required or
deems it prudent to establish, whether on account of an actual
liability or one which is, or may be asserted against it."
(Compl. Ex. A ¶ 2(b).) The conditions precedent to defendants'
obligations under this provision are plaintiff's establishment of a reserve and plaintiff's demand that defendants fulfill their
obligation under the provision by posting sufficient collateral.
These two conditions have occurred. Plaintiff has established a
reserve of $500,000 and has made the requisite demand on
defendants. (Compl. ¶ 12; Reply Mot. Prelim. Inj. Ex. B.)
Defendants do not argue that the Indemnity Agreement is
unenforceable or that they have a defense to their duty to
perform thereunder. Nor do they assert that they have complied
with the terms of the collateral security provision or that
plaintiff has somehow waived its right to enforce that provision.
Their argument that they are not required to post any collateral
because plaintiff has not yet sustained any costs, charges or
expenses is unavailing. Under paragraph 2(b), there is no
requirement that plaintiff have suffered any loss. (Compl. Ex. A
¶ 2(b) specifically contemplates liabilities that "may be
asserted against" plaintiff). Moreover, plaintiff has said that
it has already paid out money in connection with bond claims.
(Reply Mot. Prelim. Inj. Ex. A.) Defendants' argument that
plaintiff has a security interest in only property of Ockerlund,
if it has any security interest at all, is equally failing.
Paragraph 2(b) of the Indemnity Agreement is directed at all of
the indemnitors, including defendants, and contemplates the
pledge of collateral upon a future event. That future event has
come about. Finally, for the reasons discussed supra,
defendants' arguments under Grupo fail. We find that plaintiff
has shown a likelihood of success on the merits. See Western
Cas. & Sur. Co., 217 F.2d at 165 (equitable remedies of quia
timet and exoneration allow court of equity to, at surety's
request, seize funds due its principal and apply them to
principal's debts if surety can show that debts are currently
due, principal refuses to pay them and, if they are not paid,
surety will become liable); Travelers Cas. & Sur. Co., No.
03-C6985 (N.D. Ill. Nov. 26, 2003) (order granting preliminary
injunction and requiring defendants to post collateral); United States Fidelity & Guaranty Ins. Co., 2003 WL 1873926 (granting
motion for preliminary injunction in part and ordering defendants
to post collateral); United Fire & Cas. Co. v. Coggeshall
Constr. Co., Inc., No. 91-C3159, 1991 WL 169147 (C.D. Ill. June
28, 1991) (granting plaintiff specific performance of collateral
security agreement); Mountbatten Surety Co., Inc. v. Szabo
Contracting, Inc., No. 2-03-0171, 2004 WL 1380189, at *9 (Ill.
App. Ct. June 17, 2004) (court recognizes validity of collateral
security provision in indemnity agreement).
Plaintiff can also demonstrate that it has no adequate remedy
at law and that it will suffer irreparable harm. Courts have held
that a quia timet action recognizes that any judgment for money
damages without "according [the surety] relief of specific
performance pursuant to the . . . indemnity agreement is not an
adequate remedy and would irreparably harm [the surety] by
depriving it of pre-judgment relief to which it is contractually
entitled." United Fire & Cas. Co., 1991 WL 169147, at *2. See
also United States Fidelity & Guaranty Ins. Co., 2003 WL
1873926, at *2 (adopting same position). Our court of appeals has
recognized the right to the kind of relief that plaintiff seeks.
See Western Cas. & Sur. Co. v. Biggs, 217 F.2d at 165.
In addition, under the law of suretyship, even if a surety's
loss is monetary and only temporary, that it must assume a
primary obligor's obligation at all is a harm for which there is
no adequate remedy at law. See RESTATEMENT (THIRD) OF
SURETYSHIP AND GUARANTY § 21 cmts. i, j, k (1996). According to
the Restatement, "a primary obligor has a duty to refrain from
conduct that impairs the expectation of the secondary obligor
that the principal obligor will honor its duty of performance."
Id. cmt. j. Given the emphasis in the case law and in the
Restatement on the inequity of impairing a surety's expectation
and requiring it to perform a primary obligor's duty, we believe that plaintiff has shown an inadequate remedy at law and that it
will suffer irreparable harm.*fn6
Having found that plaintiff has satisfied the threshold
requirements for the issuance of a preliminary injunction, we now
turn to the final two considerations: weighing the relative harms
and the public interest. Plaintiff argues that the balance of
hardships favors it, saying essentially that defendants will
suffer no harm from the issuance of a preliminary injunction
because all parties will be placed in the position which they
bargained for at the time they executed the Indemnity Agreement
plaintiff "will receive the collateral security to which it is
entitled, and [defendants] will assume the financial risk
associated with the bonds." (Mot. Prelim. Inj. at 11.) Defendants
say that they will suffer more harm if the injunction is granted
than plaintiff will suffer if the injunction is denied. They
argue that granting the injunction will give plaintiff a lien on
their property, something plaintiff did not bargain for when it
executed the Indemnity Agreement. They also say that if their
assets are frozen or a lien placed on their home, the results
would be disastrous as it would impact their ability to meet
their financial obligations.
The balance of harms in this case tips in favor of plaintiff.
If the injunction is denied, plaintiff will be forced to use its
own funds to defend and pay claims despite defendants' promises
to the contrary. United States Fidelity & Guaranty Ins. Co.,
2003 WL 1873926, at *2. This is a serious harm. See Western Cas.
& Sur. Co., 217 F.2d at 165; RESTATEMENT (THIRD) OF SURETYSHIP
AND GUARANTY § 21 cmts. i, j, k (1996). If the injunction is
granted, defendants will be required to perform as they
contractually agreed to do. We have no information from which we
could determine the impact on defendants of providing the collateral
security plaintiff requests. Moreover, any funds that defendants
deposit as collateral, if not used to pay claims on the bonds,
will be returned to defendants. See Safeco Ins. Co.,
739 F.2d at 433 (discussing that surety will pay claims on bonds from
indemnitor's funds, otherwise surety must return funds to
indemnitor); United States Fidelity & Guaranty Ins. Co., 2003
WL 1873926, at * 2 (noting that "any funds posted by the
defendants can be easily returned by plaintiff if they are not
needed to defend the claims or pay on the claims").
Looking now to the public interest involved, we find no public
policy interest that would be served by discharging defendants'
obligation to provide collateral security under the Indemnity
Agreement on these facts. On the contrary, denying plaintiff the
benefit of the Indemnity Agreement it signed in connection with
issuing bonds under that Illinois Public Construction Bond Act
may impact the conditions under which a surety will issue bonds
and frustrate the government's interest in protecting taxpayer
money and those who provide labor on public projects. See
Housing Authority of Franklin County v. Holtzman,
256 N.E.2d 873, 881 (Ill.App. Ct. 1970) (noting purpose of Act). In
addition, Illinois law supports giving effect to the intention of
the parties in a contractual relationship. See Mountbatten
Surety Co., Inc., 2004 WL 1380189, at *8.
The cases and the Restatement make clear that, for a surety in
this situation, it is not simply an issue of a monetary loss;
rather, it is an issue of impairing a surety's expectation and
requiring it to suffer any loss, even if only temporary,
associated with the performance of a primary obligor's duty. The
law favors protecting a surety in this case. Under these
circumstances, we find that plaintiff has made the requisite
showing and we grant in part its motion for preliminary
injunction. See American Hosp. Supply Corp. v. Hospital Prod.
Ltd., 780 F.2d 589, 594 (7th Cir. 1985) ("premise of the preliminary injunction is that the remedy available at the
end of trial will not make the plaintiff whole"). Defendants
shall deposit collateral in the amount of $500,000 with plaintiff
within ten days of the date hereof.
We do not find it necessary, however, to enter an order
freezing defendants' assets or granting plaintiff a lien on
defendants' assets until the collateral has been deposited.
Similarly, the deposit of collateral will adequately protect
plaintiff's right to indemnification for losses incurred as a
result of issuing of the bonds.
For the foregoing reasons, plaintiff's motion for a preliminary
injunction is granted in part and denied in part. The parties
will submit a proposed Order consistent with this Opinion.