Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_12-cv-00390/USCOURTS-azd-2_12-cv-00390-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Travelers Casualty & Surety Co. of

America, 

Plaintiff, 

vs.

W.P. Rowland Constructors Corp.; W.P.

Rowland Properties Corp.; R.L.H.

Associates LLC; RCCG Management Inc.;

Rowland Companies-Western Inc.;

Rowland Companies-Southwest Inc.;

Rowland Companies-Central Inc.;

Rowland Constructors Group Inc.;

Rowland Companies Construction Group

Inc.; Rowland Texas GP; Rowland Texas

LP; Rowland Companies Southeast Inc.;

W.P. Rowland Enterprises LP; 8324 E.

Hartford Drive LLC; WLR Trust I; BKR

Trust I Dated 9/1/05; Linda L. Rowland;

James B. Rowland; Kimberly A. Rowland;

William P. Rowland, 

Defendants. 

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CV 12-00390-PHX-FJM

ORDER

The court has before it plaintiff's motion for preliminary injunction (doc. 14). The

entity defendants responded (doc. 32), and the individual and trust defendants joined in the

response (doc. 34). Initially, plaintiff did not file a reply. On April 16, 2012, we ordered

defendants to file a memorandum addressing the citizenship of the LLC and partnership

Case 2:12-cv-00390-FJM Document 45 Filed 05/15/12 Page 1 of 6
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 The Agreement defines indemnitors as those signing the Agreement, along with

"their present and future direct and indirect subsidiaries, affiliates, and parent companies,"

as well as "any joint venture, co-venture, consortium, partnership, trust, association, limited

liability company or other legal entity in which one or more of them are involved." Compl.,

ex. A ¶ 1 (doc. 13). 

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defendants (doc. 42). In addition, because defendants did not object to plaintiff's request for

an injunction requiring defendants to use contract proceeds from bonded projects to pay

bonded debts, we granted in part plaintiff's motion for preliminary injunction. We reserved

ruling on the remainder of the motion and ordered plaintiff to file a reply. Defendants filed

their memorandum of citizenship (doc. 43) and plaintiff filed its reply (doc. 44) in

accordance with our order.

After review of the record, we are satisfied that there is complete diversity between

the parties and find that an evidentiary hearing is not needed to resolve the remainder of

plaintiff's motion for preliminary injunctive relief. 

I

In October 2010, defendants William Rowland, Linda Rowland, James Rowland,

Kimberly Rowland, Rowland Constructors Group, RCCG Management, Roland

Companies-Western, Roland Companies-Southwest, Roland Companies-Central, W.P.

Rowland Constructors, R.L.H. Associates, LLC, the WLR Trust I, and the BKR Trust I ("the

Indemnitors") executed a General Agreement of Indemnity ("the Agreement") in exchange

for bonds issued by plaintiff. By signing the Agreement, the Indemnitors promised to

indemnify plaintiff against loss arising from the bonds.1

 The Agreement includes a

paragraph titled "Collateral Security," where the Indemnitors promised to deposit an amount

determined by plaintiff to be sufficient to discharge any losses "upon demand" of plaintiff.

Compl., ex. A ¶ 5. The Indemnitors also agreed that plaintiff "would suffer irreparable

damage and would not have an adequate remedy at law" if they failed to comply. Id.

Plaintiff issued two bonds in connection with defendants' construction projects for the

Birchman Baptist Church and the Comanche County Memorial Hospital. Plaintiff began

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receiving payment bond claims relating to these projects. On February 1, 2012, plaintiff sent

the Indemnitors a letter stating that they defaulted under the terms of the Agreement and

demanding that they deposit $1,303,088 as collateral security. Compl., ex. B.

Plaintiff filed this action on February 23, 2012. An amended complaint was filed

March 1, 2012 (doc. 11). The amended complaint asserts four counts: (1) breach of contract;

(2) specific performance - collateral; (3) quia timet; and (4) claim and delivery. That same

day, plaintiff moved for a preliminary injunction, which we have already granted in part as

discussed above (doc. 42). We now address plaintiff's outstanding request for a preliminary

injunction that (1) requires defendants to deposit $1,303,088 as collateral and (2) prohibits

defendants from transferring or otherwise secreting assets until collateral is provided. 

II

A federal court sitting in diversity applies federal procedure and state substantive law

to state law claims. See Hanna v. Plumer, 380 U.S. 460, 471, 85 S. Ct. 1136, 1144 (1965).

Plaintiff argues, citing Sims Snowboards, Inc. v. Kelly, 863 F.2d 643 (9th Cir. 1988), that

we must apply Arizona law rather than Rule 65, Fed. R. Civ. P. and its standards. We

disagree. Sims first determined that there was no direct conflict between Rule 65, Fed. R.

Civ. P. and the California anti-injunction statute, which "expressly prohibits" injunctions in

the type of claim at issue. Id. at 646. Noting that the Erie doctrine requires the application

of state law "if the state law is outcome-determinative," Sims held that a federal court sitting

in diversity may not grant preliminary injunctive relief "if state law clearly rejects the

availability of that remedy," because in that scenario the selection of state or federal law is

"outcome-determinative." Id. at 646-47. We are not presented with the same scenario. Both

federal law and Arizona law permit a court to issue the type of preliminary injunctive relief

requested by plaintiff. And at heart, Rule 65, Fed. R. Civ. P. is procedural. See id. at 646

("Rule 65 merely sets out the procedural requirements for injunctions and restraining

orders."). Accordingly, we apply it here. Because we apply the federal rule, we apply

federal law interpreting that rule. See Sullivan v. Vallejo City Unified Sch. Dist., 731 F.

Supp. 947, 957 (E.D. Cal. 1990); see also Certified Restoration Dry Cleaning Network, LLC

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v. Tenke Corp., 511 F.3d 535, 541 (6th Cir. 2007) (applying federal law "factors to consider

in granting a preliminary injunction"); Ferrero v. Associated Materials Inc., 923 F.2d 1441,

1448 (11th Cir. 1991) (applying federal standard for granting a preliminary injunction rather

than the more lenient state law standard in a diversity action). 

III

Preliminary injunctive relief is "an extraordinary remedy." Winter v. Natural Res.

Def. Council, Inc., 555 U.S. 7, 24, 129 S. Ct. 365, 376 (2008). To obtain it, plaintiff must

show that (1) it is "likely to succeed on the merits," (2) it is "likely to suffer irreparable harm

in the absence of preliminary relief," (3) "the balance of equities tips in [its] favor," and (4)

"an injunction is in the public interest." Id. at 20, 129 S. Ct. at 374. 

A preliminary injunction can be either prohibitory or mandatory. A prohibitory

injunction "prohibits a party from taking action," preserving the status quo until the action

is decided on the merits. Marlyn Nutraceuticals, Inc. v. Mucos Pharma GmbH & Co., 571

F.3d 873, 878 (9th Cir. 2009). A mandatory injunction orders a party to act in a way that

goes beyond maintenance of the status quo and "is particularly disfavored." Id. at 879

(citation omitted). Mandatory injunctions are generally not granted unless "extreme or very

serious damage will result and are not issued in doubtful cases or where the injury

complained of is capable of compensation in damages." Id. (citation omitted).

Plaintiff seeks an injunction requiring defendants to deposit $1,303,088 as collateral

security. Although plaintiff argues that pursuant to Arizona law it is entitled to injunctive

relief of collateralization under the doctrine of quia timet, it has not pointed to any Ninth

Circuit cases that grant preliminary injunctive relief of collateralization pursuant to quia

timet. See Hudson Ins. Co. v. Simmons Constr., LLC, CV-12-407-PHX-GMS, 2012 WL

869383, at *3 (D. Ariz. Mar. 14, 2012) (finding no cases in this Circuit issuing a temporary

restraining order ("TRO") based on the common-law doctrine of quia timet, noting that

courts entering TROs requiring collateralization have relied on Rule 65, Fed. R. Civ. P.).

Accordingly, to obtain collateralization as preliminary injunctive relief, plaintiff must

show that it will likely suffer irreparable harm. Id. Defendants argue that plaintiff has not

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met its burden. We agree. Plaintiff points to the Agreement's language, arguing that

defendants agreed that plaintiff "would suffer irreparable damage and would not have an

adequate remedy at law." Compl., ex. A ¶ 5. But this contractual language, without more,

does not show a likelihood of irreparable harm. See Hudson, 2012 WL 869383 at *4 (fact

that surety agreement used term "irreparable harm" did not in itself "support the

extraordinary remedy" of a temporary restraining order). Plaintiff has not shown that it is

likely to incur any damages other than the economic cost of paying the bond claims prior to

receiving collateral. Economic injury alone, however, "does not support a finding of

irreparable harm, because such injury can be remedied by a damage award." Rent-A-Center,

Inc. v. Canyon Television & Appliance Rental, Inc., 944 F.2d 597, 603 (9th Cir. 1991).

Moreover, ordering defendants to pay collateral amounts to a mandatory injunction. Plaintiff

has not shown that extreme or very serious damage will result if the collateral is not

provided. It has not, for example, established that it does not possess sufficient funds to pay

the bond claims. And it has not shown that the injury sustained by defendants' failure to

provide collateral is incapable of being compensated with money damages. See Marlyn

Nutraceuticals, 571 F.3d at 879. Because plaintiff has not shown it is likely to suffer

irreparable harm or that a mandatory injunction is warranted, it is not entitled to preliminary

injunctive relief requiring defendants to provide collateral security.

Plaintiff also requests an injunction prohibiting defendants from transferring or

secreting their assets until collateral is provided. Unlike plaintiff's request for collateral, this

is a prohibitory injunction. Dissipation of assets can constitute irreparable harm. See In re

Focus Media Inc., 387 F.3d 1077, 1086-87 (9th Cir. 2004). However, plaintiff has not shown

that irreparable harm is likely. Although plaintiff alleges in its complaint that defendants are

diverting assets into the WLR Trust II and WLR Trust III, the only evidence submitted by

plaintiff is a letter from the Trustee confirming that these trust assets cannot be assigned to

secure obligations for William Rowland because he has no interest in these two trusts. Mot.

for Prelim. Inj., ex. 7 (doc. 15). This letter does not prove that defendants will likely secret

or divert assets. It merely shows that assets, if they were to be transferred to these two trusts,

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could not be reached by plaintiff to secure William Rowland's obligations. Because plaintiff

has not shown that it is likely to incur irreparable harm, it is not entitled to preliminary

injunctive relief prohibiting defendants from diverting asserts.

IV

Despite our denial of the remainder of this motion, we note that plaintiff's likelihood

of success on the underlying merits is high. In signing the Agreement, the Indemnitors

agreed to indemnify plaintiff for loss relating to the bonds and agreed to provide collateral

upon demand. Plaintiff is now receiving bond claims and has demanded collateral, which

defendants have not provided. Although we deny plaintiff's request for preliminary

injunctive relief based on the current record, plaintiff's motion was based on its mistaken

belief that state rather than federal law would apply. It may be the case that plaintiff can

prove that it is entitled to preliminary injunctive relief under the applicable federal standards.

Accordingly, IT IS ORDERED DENYING the remainder of plaintiff's motion for

preliminary injunction (doc. 14). Plaintiff's requests that defendants be required to deposit

$1,303,088 as collateral and that defendants be prohibited from secreting or diverting assets

are DENIED. The injunction ordering defendants to use contract proceeds from bonded

projects to pay bonded debts to claimants who have properly perfected a valid bond claim

is AFFIRMED (doc. 42).

This denial is without prejudice to the right of plaintiff to file a motion showing it is

entitled to preliminary injunctive relief under federal standards.

DATED this 15th day of May, 2012.

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