The Surety Can Get An Injunction Requiring Indemnitors to Post Collateral

Most indemnity agreements have a collateralization clause requiring indemnitors to post collateral upon the surety’s demand and in the surety’s sole discretion.

Florida courts favor upholding such clauses, and will enjoin indemnitors, ordering them to post collateral. See Travelers Cas. and Sur. Co. of Am. v. Industrial Comm. Structures, 2012 WL 4792906 (M.D. Fla. 2012).

Generally, to be entitled to collateral the surety must prove:

  • A substantial likelihood of success on the merits;
  • that irreparable injury will be suffered if the relief is not granted;
  • that the threatened injury outweighs the harm the relief would inflict on the non-movant; and
  • that entry of the injunction would serve the public interest.

Travelers Cas. and Sur. Co. of Am. v. Design Build Engineers and Contractors et al., 2014 WL 7274803 (M.D. Fla. 2014) (granting injunction in favor of surety, against indemnitors).

Usually the indemnity agreement provides prima facie evidence that assists the surety in its quest for collateral. In a case from a few weeks ago the Middle District of Florida highlighted this clause from the surety’s GAI:

 

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

The rule in Florida and in many other states is sureties are ordinarily entitled to specific performance of collateral security clauses. This is because if a creditor is to have the security position for which he bargained, the promise to maintain the security must be specifically enforced. Otherwise the collateral security provision would be meaningless. Courts do not like removing meaning from contractual clauses.

Getting an injunction requiring the indemnitors to post collateral (and to not divert assets) is an important tool in the surety’s arsenal.

7.4Max Langley

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