Critical to the surety is the collateral security provision of the General Indemnity Agreement. This provision authorizes the surety to obtain funds from the Indemnitor prior to incurring any loss. A typical collateral security provision provides:
POSTING OF COLLATERAL – Indemnitors agree to deposit immediately upon demand by Surety an amount equal to the greater of: (a) the amount of any reserve established by Surety in its sole direction to cover any actual or potential liability for any Loss or potential Loss for which Indemnitors would be obliged to indemnity Surety hereunder; or (b) the amount of any Loss or potential Loss (including legal, professional, consulting, and expert fees and expenses) in relation to any claim or claims or other liabilities asserted against Surety as a result of issuing any Bond, as determined by the Surety in its sole discretion. . . . (Emphasis added).
What seems straightforward to the surety may appear unusual to a judge unfamiliar with suretyship. As one judge said in a rather puzzled tone: “Counsel, it sounds like you want money paid before the trial is even held.” Well, that’s correct. Here are some tips for prevailing on the collateral security motion filed at or near the time the complaint is filed:
1. The Judge
It is good to have the facts on your side, it is good to have the law on your side, but it is best to have the judge on your side. A federal judge is generally more likely to be on the surety’s side than a state court judge. This is typically because federal judges (1) have more experience in dealing with suretyship issues; (2) have more assistance in reaching studied decisions; and (3) are generally more likely to apply the clear terms of the GIA. In short, knowing the judge who will decide the motion is critical. One caveat to federal court is that obtaining a decision may take longer than in state court.
How do you get the judge on your side? Make it easy for the judge. State upfront in a concise sentence or two the amount of collateral sought, and the factual and legal bases in support. Although this may sound self-serving, utilizing a law firm with a reputation in the legal community and judiciary for suretyship representation is helpful.
2. Build a firm foundation
Handle the claim from the onset as if the motion for collateral will be filed. This means document, document, document. Make a demand for collateral based on the language of the GIA and quia timet related case law. The demand for collateral to the Indemnitors should attach the claim documents submitted to the surety. Conversations with the Indemnitors should be confirmed in writing. All these can be presented to the court and provide strong support for collateral security. If the documentation is unavailable, then that will weaken the motion because “if is isn’t in writing, it didn’t happen”.
3. Timing
Bad facts for the surety are good facts for the collateral motion. This means that the collateral motion is most likely to succeed when bond claims are pending, Indemnitors are scattering, assets are jeopardized or being moved, and the surety’s demand for collateral is ignored. Promptly filing the motion in this circumstance increases the likelihood for a favorable result.
4. Contract
4. Contract. Absent enforcement of the collateral provision, the court will be endorsing a breach of contract by the Indemnitors. Emphasize that the GIA collateral terms constitute material contractual terms. The indemnitor promised to post collateral security, and the surety is simply asking the court to enforce what the indemnitor already promised to provide.
5. Temporary Restraining Order confusion
Often the collateral security motion is filed on an emergency basis in the form of a TRO. In fact, in Nevada Federal Court an emergency motion must be filed in order to obtain the court’s prompt attention. The court can sometimes ignore the collateral security standard and focus instead on the TRO requirement of “irreparable harm” to the surety. The focus needs to be shifted from money to contractual rights. The primary argument being that the surety will be irreparably harmed and forever deprived of its bargained-for collateral security provision if not enforced.
6. The relief being sought is standard
Some opponents will argue that the collateral motion is an affront to legal standards wherein a decision on “damages” comes after a trial, not at the beginning of a case. Weird, uncommon terms such as quia timet underscore such an argument. Helping the court to understand that the collateral motion is standard in suretyship proceedings will result in the court being more willing to enter a collateral order.
7. Be reasonable
The judge may make inquiries at the hearing about posting lesser or alternative collateral. Be reasonable in such situations in order to obtain at least some protection, particularly in a TRO setting. The TRO may severely impact an ongoing business and its ability to perform to which the court is sensitive.
It is never certain that the court will rule justly by granting the surety’s collateral motion. As the saying goes, if one wants certain justice, buy a dog and name it “Justice”. Nevertheless, the above tips assist in building a strong collateral motion and improving the chances for a favorable result.
