Colonial Surety Company v. Phoenix Contracting Group, Inc. et al. (2012)

MEMORANDUM OF DECISION

The matter before the court is an application for a prejudgment remedy filed by the plaintiff Colonial Surety Company against the defendants Phoenix Contracting Group, Inc., (Phoenix) Lina T. Barbara and James E. Barbara.   A hearing on the plaintiffs' application was held before this court on September 7 and 8, 2011.

The plaintiff is a Pennsylvania corporation with its principal place of business located in Montvale, New Jersey.   The individual defendants reside in Milford, Connecticut and operate Phoenix, which is a construction company located in Bridgeport, Connecticut.

On or about May 1, 2008 the defendants executed and delivered to Colonial a general indemnity agreement (indemnity agreement) in favor of Colonial.   Thereafter Phoenix entered into a construction contract (contract) with Gotham Greenwich Construction Co., LLC (Gotham) whereby Phoenix was to be a subcontractor on a hotel (project) to be built in New York City by Gotham.   In accordance with the terms of the contract Colonial issued to Gotham certain payment and performance bonds in the amounts of $6,350,000 covering the contract obligations of Phoenix.   The indemnity agreement provided that the defendants would be jointly and severally liable to Colonial for all costs, damages and expenses incurred by Colonial as a result of having issued the bonds in favor of Gotham.

After work on the project had started, Gotham filed suit against Phoenix alleging that Phoenix had failed to perform its obligations on the contract it had with Gotham.   Gotham also sued Colonial on the performance bond that Colonial had issued in favor of Gotham.   By way of an amended complaint Gotham has demanded judgment against Phoenix and Colonial in an amount exceeding $3,500,000.00.

After receiving notice of the suit by Gotham against Colonial and Phoenix, Colonial notified the defendants it was seeking indemnification, pursuant to paragraph 3 of the indemnity agreement, for all costs which Colonial had incurred with reference to the claims of Gotham.   This expense was claimed to total $89,165.56 as of February 8, 2011 when the first demand letter was sent by Colonial to the three defendants.

The aforesaid demand letter also requested that the defendants, pursuant to paragraph 7 of the indemnity agreement, post with Colonial an amount of money sufficient to cover any reserves set up by Colonial to cover the demands by Gotham under the bonds issued by Colonial to Gotham on behalf of Phoenix.   Paragraph 7 of the indemnity agreement provides that the amount of collateral security “shall be in such amount as Colonial in its sole discretion deems appropriate.”

Colonial has filed an amended seven-count complaint.   The application for a prejudgment remedy is based on the first count alleging a claim of contractural indemnification and on the seventh count seeking an order that the defendants be required to post collateral security in the amount of $3,500,000.00.

Following the hearings held on September 7 and 8, 2011 the plaintiff, on September 9, 2011, filed a request to amend its complaint by adding the seventh count alleging a claim of Collateral Security.   This claim had been the focus at the hearing with the plaintiff claiming that it was entitled to a prejudgment remedy requiring the defendants to post collateral security of $3,500,000.   There was no indication at the hearing that the plaintiff wished to amend its complaint.   The defendants did not file an objection to the request to amend within fifteen days of its filing as proscribed by Section 10–60 of the Practice Book and therefore the amendment is deemed to have been filed by consent of the defendants.   In addition, the amendment merely conforms the pleadings to the evidence that was offered in the hearing.

The first claim for which the plaintiff seeks a prejudgment remedy is a claim for attorneys fees and investigative costs totaling $89,165.56 as alleged in the first count of the amended complaint, and is based on Paragraph 3 of the indemnity agreement which provides:

3.  INDEMNITY ․ [I]ndemnify, and save harmless [Colonial] from and against any and all (i) demands, liability, losses, costs, damages or expenses of whatever nature or kind, including all fees of attorneys and all other expenses, including but not limited to costs and fees of investigation, adjustment of claims, procuring or attempting to procure the discharge of Bonds, enforcement of any Contract with Indemnitor, and in attempting to recover losses or expenses from Indemnitor, or third parties, whether or not [Colonial] shall have paid out any or all of such sums, (ii) amounts sufficient to discharge any claim made against [Colonial] on any Bond, which amounts may be used by [Colonial] to pay such claim, or may be held by [Colonial] as collateral security against any loss on any Bond, and (iii) any premiums due on Bonds issued by [Colonial] on Behalf of the Principal (hereinafter the “Indenmity”).

The second claim for which the plaintiff seeks a prejudgment remedy is as alleged in the seventh count of the amended complaint and is based on Paragraph 7 of the indemnity agreement which provides:

7.  COLLATERAL SECURITY.   If a claim is made against [Colonial], or if [Colonial] deems it necessary to establish a reserve for potential claims, and upon demand from [Colonial], [the Indemnitors] shall deposit with [Colonial] cash or other property acceptable to [Colonial], as collateral security, to protect [Colonial] with respect to such claim or potential claims and any anticipated expense and attorneys fees.   Such collateral security shall be in such amount as [Colonial] in its sole discretion deem appropriate.   Such collateral may be held by [Colonial] until it has received satisfactory evidence of its complete discharge from such claim or potential claims, and until it has been fully reimbursed for all losses, expenses, fees, and paid all premiums due.  [Colonial] has no obligation to [the Indemnitors] to provide interest on the collateral deposit.

Colonial claims that the indemnity agreement provides that the filing of a claim is the event which triggers its rights to indemnification of expenses and to seek the posting of collateral by the defendants in an amount which Colonial, in its sole discretion, deems to be appropriate.   A claim has been filed by Gotham, and Colonial has offered evidence that it will obtain a judgment against the defendants of at least $89,165.56 as indemnification of the expenses incurred or to be incurred in the handling of the Gotham suit.   With respect to the second claim by Colonial it claims that the defendants should be ordered to post collateral security in the amount of $3,500,000.   This is the amount of security that Colonial “in its sole discretion” has determined it wants and it is also the amount of the ad damnum that Gotham is alleging in its suit against Phoenix and Colonial.

In response to the application for a prejudgment remedy the defendants claim that the suit by Gotham has no merit, that in fact Phoenix has a valid substantial claim against Gotham, and that Colonial has been acting with bad faith in making its claims for indemnification of its expenses and for the posting of collateral security.

The claims of Colonial are not based on the merits of Gotham's claims against Phoenix.   It is Colonial's position that the strength of Gotham's case is irrelevant with respect to its right to a prejudgment remedy.   It claims that the filing of the claim by Gotham is the triggering event for the defendants' indemnity and collateral security obligations.

The law is clear with respect to the limited nature of prejudgment remedy proceedings.   At the outset, we emphasize that “prejudgment remedy proceedings are not involved with the adjudication of the merits of the action brought by the plaintiff or with the progress or result of that adjudication.   They are only concerned with whether and to what extent the plaintiff is entitled to have property of the defendant held in the custody of the law pending adjudication of the merits of that action.”  (Internal quotation marks omitted.)  Cahaly v. Benistar Property Exchange Trust Co., 73 Conn.App. 267, 273, 812 A.2d 1 (2002), rev'd on other grounds, 268 Conn. 264, 842 A.2d 1113 (2004).   This limited evidentiary proceeding contrasts sharply with, for example, the detailed and substantive arguments and conclusions that must be addressed in a motion to strike.   See William Beazley Co. v. Business Park Associates, Inc., 34 Conn.App. 801, 805, 643 A.2d 1298 (1994).

“The purpose of the prejudgment remedy of attachment is security for the satisfaction of the plaintiff's judgment, should he obtain one ․ It is primarily designed to forestall any dissipation of assets by the defendant and to bring [those assets] into the custody of the law to be held as security for the satisfaction of such judgment as the plaintiff may recover ․ The adjudication made by the court on [an] application for a prejudgment remedy is not part of the proceedings ultimately to decide the validity and merits of the plaintiff's cause of action.   It is independent of and collateral thereto ․” (Citations omitted;  emphasis in original;  internal quotation marks omitted.)  Cahaly v. Benistar Property Exchange Trust Co., supra, 73 Conn.App. 274–75.

“General Statutes § 52–278d(a) provides in relevant part that a hearing on a prejudgment remedy shall be limited to a determination of ․ whether or not there is probable cause that a judgment in the amount of the prejudgment remedy sought, or in an amount greater than the amount of the prejudgment remedy sought, taking into account any defenses, counterclaims or set-offs, will be rendered in the matter in favor of the plaintiff ․ If the court, upon consideration of the facts before it and taking into account any ․ [defenses] ․ finds that the plaintiff has shown probable cause that such a judgment will be rendered in the matter in the plaintiff's favor in the amount of the prejudgment remedy sought and finds that a prejudgment remedy securing the judgment should be granted, the prejudgment remedy applied for shall be granted as requested or as modified by the court.”  (Internal quotation marks omitted.)  Benton v. Simpson, 78 Conn.App. 746, 750–51, 829 A.2d 68 (2003).

“The legal idea of probable cause is a bonafide belief in the existence of the facts essential under the law for the action and such as would warrant a [person] of ordinary caution, prudence and judgment, under the circumstances, in entertaining it ․ Probable cause is a flexible common sense standard.   It does not demand that a belief be correct or more likely true than false ․” Marlin Broadcasting, LLC v. Law Office of Kent Avery, LLC, 101 Conn.App. 638.

With respect to Colonial's claim against the defendants seeking indemnification for its costs and expenses defending the New York action by Gotham the court finds that the strength or weakness of Gotham's suit is not relevant in determining the merits of Colonial's request for the prejudgment remedy of indemnification.   Colonial has shown probable cause that it will obtain a judgment based on the first count of the amended complaint for indemnification in the sum of $89,165.56.

The second portion of Colonial's request for a prejudgment remedy involves the allegations of the seventh count of the amended complaint alleging a refusal by the defendants to post collateral security in the amount of $3,500,000.00 as requested by Colonial.   Colonial seeks an order from this court that the defendants should post collateral security of $3,500,000.00.   The court finds that the order sought by the plaintiff as a prejudgment remedy is not authorized by General Statutes Section 52–278a(d) which defines the term “prejudgment remedy.”   This definition has been the subject of many decisions.

General Statutes § 52–278a(d) defines a prejudgment remedy as “any remedy or combination of remedies that enables a person by way of attachment, foreign attachment, garnishment or replevin to deprive the defendant in a civil action of, or affect the use, possession or enjoyment by such defendant of, his property prior to final judgment but shall not include a temporary restraining order.”  Section 52–278a, therefore, expressly limits the term “prejudgment remedy” to “an attachment, a foreign attachment, a garnishment, replevin or a combination thereof.”  Feldmann v. Sebastian, 261 Conn. 721 (2002).

The plaintiff requests, as a prejudgment remedy, that the court order the defendants to post collateral of $3,500,000.00.

“It is apparent, when we construe § 52–278a(d) strictly, as we must, that the legislature limited the definition of prejudgment remedy to attachments, foreign attachments, garnishments, replevin or a combination thereof.”   See General Statutes § 52–278a(d).  “When legislation defines the terms used therein such definition is exclusive of all others.  Neptune Park Assn. v. Steinberg, 138 Conn. 357, 362, 84 A.2d 687 (1951).”  Rhode Island Hospital Trust National Bank v. Trust, supra, 25 Conn.App. 31;  see also 2A J. Sutherland, Statutory Construction (5th Ed. Singer 1992) § 47.07, p. 152 (statutory definition that declares what term means excludes any meaning not stated.).  Feldmann v. Sebastian, 261 Conn. 721 (2002).

“The plaintiff's claim is flawed, however, because the “operation of a statute in derogation of the common law is to be limited to matters clearly brought within its scope.”  (Emphasis added;  internal quotation marks omitted.)   Vitanza v. Upjohn Co., supra, 257 Conn. 381.   The relevant inquiry, therefore, is what the prejudgment remedy statutes bring within their scope, not what they fail to prohibit.”  Cahaly v. Benistar Property Exchange Trust Co., 268 Conn. 264 (2004).

The court finds that the prejudgment remedy sought by Colonial that the court order the defendants to post collateral security is not authorized by Section 52–278a(d).  The request for a prejudgment remedy which orders the defendant to post collateral security of $3,500,000.00 is denied.

The court finds that the plaintiff has established probable cause that a judgment in the amount of $90,000.00 will be rendered on the first count of the complaint in favor of the plaintiff.

The plaintiff may attach and garnish to the value of $90,000.00 all real property, all bank accounts, all personal property and equipment, and all assets and credits owned by the defendants, all whether owned jointly or individually

William L. Hadden, Jr.

Judge Trial Referee

Hadden, William L., J.T.R.