UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
November 9, 1992
DOVER STEEL COMPANY, INC., et al., Plaintiffs
THE HARTFORD ACCIDENT AND INDEMNITY COMPANY, et al., Defendants
The opinion of the court was delivered by: EDUARDO C. ROBRENO
Presently before the Court is plaintiffs' motion for a preliminary injunction. For the following reasons, the motion will be denied.
This is an action brought by plaintiffs Dover Steel Company, Inc. ("Dover") and A.M.B. Construction Company, Inc. ("A.M.B.") against two insurance companies, defendants The Hartford Accident and Indemnity Company ("Hartford") and New Hampshire Insurance Company ("New Hampshire"). Jurisdiction is predicated upon 28 U.S.C. § 1332. Plaintiffs, among others, have been named as defendants in a suit now pending in the United States District Court for the District of Delaware ("the Delaware action").
In their complaint filed in the case now before this Court, plaintiffs contend that both defendants are obligated, under certain insurance policies which each issued to plaintiffs, to provide plaintiffs with a defense in the Delaware action and to indemnify plaintiffs for any damages that may result therefrom. Plaintiffs allege that the defendants are wrongfully refusing to provide such a defense, and are wrongfully refusing to acknowledge their obligation to indemnify.
Plaintiffs filed the instant complaint in this Court on September 30, 1992, together with a motion for a preliminary injunction. In their motion, plaintiffs ask the Court to: 1) compel the defendants to immediately tender approximately $ 125,000 to plaintiffs, representing the amount that plaintiffs contend plaintiffs have already expended in defending the Delaware action, and 2) require the defendants to assume all costs that plaintiffs will incur in defending the Delaware action from this point forth.
In support of their motion, plaintiffs assert that Dover
will suffer irreparable harm if the injunction is not granted in that Dover is on the brink of financial collapse and will soon file for Chapter 11 bankruptcy if it is not reimbursed for the legal fees it has already expended in defense of the Delaware action. Plaintiffs also, of course, assert that their eventual success on the merits of their claim is likely. In essence, plaintiffs are proceeding on the theory that at least one of the two claims raised in the Delaware action comes squarely within at least one of the insurance policies issued by New Hampshire, and that, in any event, both defendants gave certain assurances and took various actions so that they are now both estopped from denying coverage.
Following expedited discovery, this Court held a hearing on plaintiffs' preliminary injunction motion on November 3, 1992 and November 4, 1992. See Fed.R.Civ.P. 65(a). At the hearing, plaintiffs presented testimony from three witnesses. Only one of the three, Mr. Anthony Sinibaldi, president and one of the principal shareholders of Dover, offered testimony on the issue of whether plaintiffs will suffer irreparable harm if an injunction is not issued.
After the conclusion of Mr. Sinibaldi's testimony, the defendants urged the denial of plaintiffs' motion for a preliminary injunction on the ground that plaintiffs had failed to show irreparable harm. The Court denied defendants' request, but agreed to reconsider the issue at the conclusion of plaintiffs' case. After plaintiffs rested, defendants renewed their request, and have not yet had occasion to answer plaintiff's claims. For the reasons set forth below, plaintiffs' request for preliminary injunction is DENIED on the basis that they have failed to make the requisite showing that irreparable harm will ensue from the denial of the relief requested. To the extent that plaintiffs' motion includes a request for reimbursement of the attorneys fees that they have already expended, the motion is alternatively denied on the ground that such an award is in the nature of money damages which, under the circumstances of this case, are not available as preliminary injunctive relief.
The factors governing whether a preliminary injunction should be awarded are well established:
In order to support a preliminary injunction, plaintiff must show both a likelihood of success on the merits and a probability of irreparable harm. Additionally, the district court should consider the effect of the issuance of a preliminary injunction on other interested persons and the public interest.
. . .
Campbell Soup Company v. Conagra Inc., 977 F.2d 86, quoting Bradley v. Pittsburgh Board of Education, 910 F.2d 1172 (3d Cir. 1990). "[A] failure to show a likelihood of success or a failure to demonstrate irreparable injury . . . must necessarily result in the denial of a preliminary injunction." In Re Arthur Treacher's Franchisee Litigation, 689 F.2d 1137 (3d Cir. 1982). Ultimately, determining whether a preliminary injunction should issue is within the sound discretion of the district court. Kershner v. Mazurkiewicz, 670 F.2d 440, 443 (3d Cir. 1982) (en banc).
Plaintiffs allege that they will suffer irreparable harm if they are denied the injunctive relief they request because without it they will be forced into bankruptcy. There is no doubt that, under certain circumstances, the prospect of imminent bankruptcy may constitute irreparable harm for purposes of awarding preliminary injunctive relief. See, e.g., Doran v. Salem Inn, Inc., 422 U.S. 922, 95 S. Ct. 2561, 45 L. Ed. 2d 648 (1975); Associated Producers v. City of Independence, Mo., 648 F. Supp. 1255 (W.D.Mo. 1986).
As noted, plaintiffs seek two forms of injunctive relief. One is retroactive - immediate reimbursement for defense costs already expended; the other is prospective - an order requiring the defendants to undertake their defense in the Delaware action. These two forms of injunctive relief will be addressed separately.
Compelling Defendants to Reimburse Plaintiffs for the Costs of Defense Incurred to Date
Plaintiffs' Failure of Proof Regarding Dover's Financial Condition
The Court concludes that plaintiffs have not met their burden of demonstrating that immediate reimbursement of the $ 125,000 is necessary to stave off bankruptcy.
The plaintiffs' proofs were wholly deficient, consisting only of vague, general testimony relating to Dover's current financial condition. Plaintiffs did not introduce, as they should have, any financial statements, tax returns, general ledgers, or other documentary evidence of Dover's financial health. In fact, there was no evidence presented concerning Dover's assets and the extent to which they were subject to liens, or of Dover's general liabilities. To the contrary, the specific facts which were proffered by plaintiffs do not support the claim that bankruptcy is imminent and unavoidable. To wit, Mr. Sinibaldi testified that Dover is currently working under one contract that is enabling Dover to cover payroll and taxes. Transcript of Day 1 of Preliminary Injunction Hearing ("Transcript"), p. 17. He also stated that Dover has several bids currently pending on various contracts, and that "one good contract could turn this around overnight." Transcript, p. 72. Dover also apparently has an authorized line of credit with Wilmington Trust which would, according to Mr. Sinibaldi, become available if Dover is awarded an additional contract. Transcript, p. 71-72. Dover has also apparently managed to survive for some time despite its allegedly dire condition. For example, Mr. Sinibaldi testified that Dover has been existing "hand to mouth" since September of 1991, and although Mr. Sinibaldi also testified that conditions have recently become worse, (Transcript, p. 76), plaintiffs presented no corroborative evidence that Dover's financial condition is any more severe now than it was in 1991. Very probative was the lack of evidence of any litigation pending or judgments entered against Dover. Finally, and most curiously, Mr. Sinibaldi failed to explain why a $ 400,000 receivable owed to it by Standard Chlorine, the plaintiff in the Delaware action, was simply "[written] . . . off" by Dover. Transcript, p. 77.
The strongest evidence of Dover's financial distress involves a claim that Dover's workers' compensation insurance expired on October 30, 1992, that Dover will be unable to renew its policy at the cost quoted, Transcript, p. 80-81, and that Dover's receivables (excluding the unexplained $ 400,000 owed by Standard Chlorine), amount to only half of its payables. Transcript, p. 72-73. However, because, as discussed above, plaintiffs failed to present an adequate financial picture of Dover, the Court is unable to evaluate whether, on balance, Dover's financial circumstances are so precarious as to compel a finding that bankruptcy is imminent and unavoidable.
Collection of A Disputed Debt by Means Of Preliminary Injunctive Relief
An alternative ground for denying plaintiffs' request for payment of $ 125,000 pendente lite is that plaintiffs herein are, in effect, asking the Court to require defendants to pay plaintiffs the damages plaintiffs seek in the underlying contract dispute while that dispute is in the process of being litigated.
Plaintiffs' claim to immediate payment is foreclosed by the Third Circuit's decision in In Re Arthur Treacher's Franchisee Litigation, 689 F.2d 1137 (3d Cir. 1982). In that case, a franchisee withheld royalty payments to the franchisor on the ground that the franchisor had breached the franchise agreement. During the pendency of the resulting suit brought by the franchisor, the district court issued a preliminary injunction ordering the franchisee, inter alia, to immediately reimburse the franchisor for the back royalty payments that the franchisee had withheld. The district court found that without issuance of the injunction the franchisor would be forced to file for bankruptcy and, therefore, would suffer irreparable harm.
The Third Circuit reversed the grant of the preliminary injunction. The Court framed the threshold issue as "whether the district court may award damages at a preliminary stage of the proceeding and prior to factfinding and final judgment." Arthur Treacher's, 689 F.2d at 1144. In answering that question in the negative, the Court relied upon Schlosser v. Commonwealth Edison Company, 250 F.2d 478 (7th Cir.), cert. denied, 357 U.S. 906, 78 S. Ct. 1150, 2 L. Ed. 2d 1156 (1958) (retired employee sought to recover monies which he claimed were due and owing under annuity program in existence at the time of his retirement). The Court quoted that portion of Schlosser which stated that:
It is indeed a novel theory that in an action for the recovery of damages the right to which is controverted by defendant, a preliminary injunction should issue to require a defendant to make payments in advance of a determination of the case on its merits.
Arthur Treacher's, 689 F.2d at 1145, quoting Schlosser, 250 F.2d at 480-81. The Court also quoted no less venerable an authority than Judge Learned Hand, who had opined that:
Under the guise of a mandatory injunction I do not see how I can give final relief in advance of answer and trial [in a case for conversion of money]. It is, of course, true that equity will at times affirmatively restore the status quo ante pending the suit. But never, so far as I know, will it take jurisdiction over a legal claim merely to hurry it along by granting final relief at the outset of the cause.
Arthur Treacher's, 689 F.2d at 1145, quoting Sims v. Stuart, 291 F. 707, 707-08 (S.D.N.Y. 1922). In light of these authorities, the Third Circuit concluded that the district court's preliminary award of back royalties "misconceives the equitable nature and purpose of an injunctive proceeding." Arthur Treacher's, 689 F.2d at 1145.
These principles apply with equal force to plaintiffs' claim for preliminary payment of the attorneys' fees they have expended to date. Plaintiffs do not contend that defendants hold the $ 125,000 under an express trust, See In re Penn Central, 486 F.2d 519, 524 (3d Cir. 1973) (en banc), cert. denied, 415 U.S. 990, 94 S. Ct. 1588, (1974), or that the funds in question are otherwise subject to tracing. To the contrary, plaintiffs are general creditors seeking relief that is legal rather than equitable in nature, stemming from a contract debt allegedly due and owing.
To award plaintiffs the $ 125,000 payment they seek now would be tantamount to making available to plaintiffs the financial fruits of victory when their right to obtain judgment remains at issue.
Compelling Defendants to Prospectively Assume Plaintiffs' Defense of the Delaware Action
The question of whether the defendants can be compelled, at a preliminary stage of the proceedings, to prospectively assume plaintiffs' defense in the Delaware action presents a closer question than that relating to payment of past damages. On this record, however, such remedy is not available to plaintiffs. As a threshold matter, the Court notes that it has already determined that plaintiffs may not recover the $ 125,000 payment at this time through a preliminary injunction. If plaintiffs are correct in their prediction and Dover does, in fact, soon file for bankruptcy protection,
the question of defendants' obligation to undertake plaintiffs' defense becomes moot because the Delaware action would be stayed by operation of the bankruptcy automatic stay, thereby obviating the need for an immediate defense. See 11 U.S.C. § 362(a).
The question of defendants' obligation to provide a defense becomes relevant only if Dover stays out of bankruptcy. If Dover avoids bankruptcy and seeks to continue to defend the Delaware action, the issue of irreparable harm would arise if plaintiffs' attorneys choose to withdraw and were allowed to do so by the court and a significant legal event was in the offing (trial or argument on a significant motion) which plaintiffs were without the legal wherewithal to handle. Regrettably, Dover offered no evidence that counsel representing plaintiffs in the Delaware action intend to withdraw their representation in the near future or that there is some legal event or deadline that plaintiffs will not be able to meet unless insurance company retained counsel enters an immediate appearance. Therefore, on this record, the court can not conclude that irreparable harm would ensue if defendants do not undertake an immediate defense of the Delaware action.
For the foregoing reasons, plaintiffs' motion for a preliminary injunction will be denied. Despite this denial, the Court nonetheless recognizes the need for some expedited consideration of the issues raised in this matter. Accordingly, the Court will set an early discovery cutoff and trial date.
An appropriate Order will be entered.
EDITOR'S NOTE: The following court-provided text does not appear at this cite in 806 F. Supp. 63.
AND NOW, TO WIT, this 9th day of November, 1992, upon consideration of plaintiffs' motion for a Preliminary Injunction, and after hearing, IT IS ORDERED that the Motion for a Preliminary Injunction is DENIED.
EDUARDO C. ROBRENO, J.