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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2004 LC CASE SUMMARIES No. Civ. A. 3:02-CV-1341-K, 2004 U.S. Dist. LEXIS 4729 (N.D. Tex. Mar. 24, 2004) [U.S.A.]
Topic: Specific Performance
Type of Lawsuit: Insurers sued Insureds to mandate the issuance of an LC pursuant to the terms of their agreement.
Parties:
Plaintiffs/Insurers- Liberty Mutual Insurance Co., Liberty Mutual Fire Insurance Co., and Liberty Insurance Corp. (Counsel: Russell Ray Yager, Paul E. Heath, Todd A. Murray of Vinson & Elkins, Dallas, TX)
Defendant/Insured/Parent- Nations Personnel of Texas, Inc.
Defendant/Insured/Subsidiaries- Odyssey Business Services of Nevada, Inc. (Counsel: Mark A. Alexander of Simpson Woolley & McConachie, Dallas, TX; A. Robert Gloyna, III of Law Office of Robert Gloyna, Irving, TX); Patio Service Station, Inc. (Counsel: Arthur E. Anthony of Locke Liddell & Sapp, Dallas, TX); Staf USA, Inc. (Counsel: Anthony Lee Icenogle of De Leon Boggins & Icenogle, Austin, TX); Patems, L.L.C. (Counsel: Gary R. Powell of Locke Liddell & Sapp, Dallas, TX); Windsor Safety, L.L.C. (Counsel: Vance Stanton of Law Office of L Vance Stanton, Dallas, TX); Odyssey Safety, L.L.C.; Staff USA, Inc.; SUSA, L.L.C.; and Windsor Staff Management, Inc.
Underlying Transaction: Workers' compensation insurance policies.
LC: Potential financial standby LC for US$7,023,665.
Decision: The U.S. District Court for the Northern District of Texas, Dallas Division, Kinkeade, J., granted summary judgment for Insurers, ordering Insureds to cause an irrevocable LC in the amount of US$7,023,665 to be issued in favor of Insurers.
Rationale: Where an unambiguous collateral security clause exists in a contract that is not unfair or oppressive, and Insureds have received the benefits of the bargain without performing their obligations, specific performance of the collateral security clause is appropriate.
Article
Factual Summary: Professional employer organizations that "leased" employees were required by state law to provide workmen's compensation insurance. Accordingly, after merging, and as a result of litigation, subsidiaries obtained insurance from parent's Insurers, agreeing jointly and severally to collateralize estimated unpaid total premiums under a so-called cash funding schedule. The agreement provided that, on the occurrence of certain default events, Insureds would provide Insurers with a "clean irrevocable letter of credit", and that if Insureds did not maintain sufficient collateral security, Insurers would be entitled to specific performance.
When Insureds failed to provide cash collateral, Insurers demanded that the amount due either be funded or that a letter of credit be issued. Shortly thereafter, Parent/Insured filed for bankruptcy. On other Insureds' failure to provide the agreed security, Insurers filed an action for specific performance and moved for summary judgment, which the trial court granted.
Legal Analysis:
1. Specific Performance: The trial court noted that "[c]ourts have generally granted specific performance to enforce collateral security clauses based on the premise such remedy is required to protect the surety's bargain." Noting that Insureds "received the benefits of insurance policies covering their employees and claims paid out by [Insurers] on behalf of [Insureds'] employees, without fulfilling their obligations," and that Parent/Insured filed for bankruptcy protection without fulfilling its obligations, the court concluded that there was no ambiguity in the agreement, and that the agreement was not unfair or oppressive, and that the Insurers were entitled to specific performance in the form of the issuance of an LC in the amount of US$7,023,665. 328
Comments: This case is noteworthy because it is one of the few instances in which a court has granted specific performance by ordering that a LC be issued. The agreement provided for a clean LC, which would make its terms relatively simple. If the standby had not been clean and if there was no model form in the agreement, one wonders whether the court would so readily have ordered specific performance.
[JEB/sal]
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