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Merchants Bonding Co. (Mutual) v. Arkansas Construction Solutions LLC

United States District Court, W.D. Arkansas, Fayetteville Division

February 5, 2019




         Now before the Court is a motion for preliminary injunction, styled “Application for Injunctive Relief” (Doc. 3), filed by Merchants Bonding Company (Mutual) and Merchants National Bonding, Inc. (collectively, “Merchants”). Defendants R.L. Stockett & Associates, LLC, Rick L. Stockett, and Diana Stockett (collectively, “the Stockett Defendants”) filed a Response in Opposition to the motion (Doc. 44), and Merchants filed a Reply (Doc. 47).[1]The motion is GRANTED.[2]

         I. BACKGROUND

         The parties do not dispute the following background facts. Merchants filed the instant case, requesting declaratory and injunctive relief and damages for breach of contract, on May 14, 2018. All Defendants entered into an Indemnity Agreement (Doc. 1-1) with Merchants to cover losses associated with certain payment and performance bonds that Merchants issued on behalf of ACS in connection with the Sunrise Ridge Subdivision construction project. ACS had been selected as the contractor on the construction project, and the developer, Sunrise Developers, Inc. (“Sunrise”), required ACS to obtain payment and performance bonds to insure its work. ACS approached Merchants for the bonds. In exchange, Merchants required ACS to fully indemnify Merchants against any and all losses that might be claimed against the bonds, as well as provide Merchants, upon demand, with collateral security “to cover any liability for any loss or expense for which [Merchants] may be obligated to indemnify the Company . . . .” (Doc. 1-1, p. 5). The Stockett Defendants agreed to serve as indemnitors on the payment and performance bonds.

         The day after all Defendants signed the Indemnity Agreement, Merchants formally issued the payment and performance bonds on behalf of ACS as principal, and for the benefit of Sunrise as developer. See Doc. 29-1, p. 32. At some point, problems arose on the construction site of the Sunrise Ridge Subdivision, and some subcontractors began making claims against ACS and Sunrise for payment. One of those subcontractors, Del-Sha Construction, LLC, (“Del-Sha”) filed a lawsuit against ACS, Sunrise, and Merchants in Benton County, Arkansas Circuit Court, Case Number 04CV-17-1370, requesting payment under the Merchants payment bond for work Del-Sha performed on the Sunrise Ridge subdivision. See Doc. 29-1. Then ACS filed a mechanics lien against Sunrise, and Sunrise filed a cross-claim against ACS and Merchants.

         In an earlier Order issued in the case at bar (Doc. 42), this Court found that the federal case before it (concerning the Indemnity Agreement) and the Del-Sha case currently being litigated in state court (concerning the amounts disputed and allegedly owed under the payment and performance bonds), are not parallel, and this Court was therefore not required to abstain from ruling on the issues before it. The Court explained its reasoning as follows:

The state court is currently being asked to adjudicate the parties' rights under the payment and performance bonds and determine who should be paid and in what amounts. These claims are not at issue in the federal lawsuit. The Stockett Defendants also contend that the “preliminary issue of whether the construction contract was breached by S.D. [Sunrise] or by ACS . . . must be decided first” by this Court, [Doc1. 29] at 10. Their thinking on this point, apparently, is that if ACS is eventually absolved of all liability in state court on the bond issues, then any action by this Court to require the Stockett Defendants to pony up collateral to secure the bonds will end up being a waste of time. Certainly, the Stockett Defendants prefer not to indemnify Merchants and not to post any collateral. They would much rather wait and see how the state court action plays out, and then, perhaps a year or more from now, after all obligations under the payment and performance bonds have been fully resolved, permit Merchants to then proceed with their federal claims under the Indemnity Agreement. But surely this “wait-and-see” strategy was not contemplated by the parties when they signed the Indemnity Agreement.
Contrary to the Stockett Defendants' position, the Court believes that deciding Merchants' claims in the instant lawsuit will not require the Court to decide “the preliminary issue of whether the construction contract was breached by S.D. [Sunrise Developers] or by ACS.” (Doc. 29, p. 10). It is the state court that is tasked with resolving the parties' claims under the payment and performance bonds, not the federal court. It is therefore also the state court's task to determine the validity and enforceability of those bonds, if called upon to do so. Accordingly, if any party to this action requests that this Court make rulings concerning the validity, enforceability, or obligations owed under the payment and performance bonds, the Court will abstain from doing so in favor of allowing the state court to rule on those issues. Further, if the state court eventually determines that the bonds are null and void (as Mr. Stockett contends), such a decision will not adversely affect the rulings made by this Court with respect to the Indemnity Agreement or otherwise result in a net waste of judicial resources.

(Doc. 42, pp. 9-10)

         The issue that is now ripe for decision is whether Merchants is entitled to a preliminary injunction that would require the Stockett Defendants to provide collateral to Merchants in the sum of $700, 000. Although the full penalty sum of the payment bond at issue is only $500, 000, it appears Merchants is demanding $700, 000 in collateral because it estimates that its total current outstanding exposure under the bonds, including its projected attorney's fees, is $200, 000 in excess of the full penalty sum of the bonds.

         There are four factors that a court must consider, generally, in ruling on a motion for preliminary injunction. The Stockett Defendants contend that none of the four factors weighs in favor of issuing the preliminary injunction. Below, the Court will explain the four factors and consider whether they do, indeed, weigh in favor of granting preliminary injunctive relief.


         It is well established that “a preliminary injunction is an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion.” Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (citing 11A C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure § 2948, pp. 129-130 (2d ed. 1995)) (emphasis in original).

         Although the factors to be considered when deciding whether this burden has been met are similar nationwide, district courts in the Eighth Circuit should consider: (1) the threat of irreparable harm to the movant in the absence of injunctive relief; (2) the movant's likelihood of success on the merits; (3) the balance between this harm and the injury that granting the injunction will inflict on the other party; and (4) whether the injunction is in the public interest. Dataphase Sys., Inc. v. C L Sys., Inc., 640 F.2d 109, 114 (8th Cir. 1981). While no single factor is determinative, id., the Eighth Circuit has made clear that in weighing whether to grant a preliminary injunction, the “likelihood of success on the merits is most significant.” Minn. Ass'n of Nurse Anesthetists v. Unity Hosp., 59 F.3d 80, 83 (8th Cir. 1995) (quoting S & M Constructors, Inc. v. Foley Co., 959 F.2d 97, 98 (8th Cir. 1992)). Despite the importance of the likelihood of success on the merits, the inquiry should focus on “whether the balance of the equities so favors the movant that justice requires the court to intervene to preserve the status quo until the merits are determined.” Dataphase, 640 F.2d at 113.


         A. Threat of Irreparable Harm

          The Court begins its discussion of the Dataphase factors by considering whether Merchants would face a threat of irreparable harm if the Court refused to grant a preliminary injunction. The Court takes up this argument first because it is the one that is the most hotly contested by the parties, and it can be resolved by the Court as a matter of law, without reference to any evidence or disputes of fact. First, the Stockett Defendants contend that Merchants' demand for preliminary injunctive relief is for the payment of collateral, which is a demand that is solely monetary in nature. They argue that since the demand is for monetary relief, there is an adequate remedy at law available to Merchants, and a preliminary injunction-which is ordinarily available only for equitable relief-would not be warranted. Second, the Stockett Defendants maintain that Merchants delayed in seeking relief from this Court, which tends to undercut Merchants' argument that it will suffer irreparable harm unless it obtains preliminary relief.

         The Court agrees with the Stockett Defendants that, in the ordinary case, a party's ability to be fully compensated through an award of damages means that its harm is neither “irreparable” nor equitable in nature. See Watkins Inc. v. Lewis, 346 F.3d 841, 844 (8th Cir. 2003) (“When there is an adequate remedy at law, a preliminary injunction is not appropriate.”). But here, the Court is persuaded that even if Merchants were to fully recover its monetary damages at the end of the litigation, it still would not be made whole for the Stockett Defendants' breach of the collateral security provision of the Indemnity Agreement. The issue is not simply one ...

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