Rli Ins. Co. v. Nexus Servs., Inc.

RLI INSURANCE COMPANY, Plaintiff, v. NEXUS SERVICES, INC., Defendant, v. JUAN VALOY, et al., Intervenors.

Civil Action No. 5:18-CV-00066

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF VIRGINIA HARRISONBURG DIVISION

July 2, 2018

By: Michael F. Urbanski Chief United States District Judge

MEMORANDUM OPINION

This matter is before the court on a motion for preliminary injunction filed by plaintiff RLI Insurance Company ("RLI"). ECF No. 4. RLI seeks an order enforcing provisions of a Commercial Surety General Indemnity Agreement (the "Indemnity Agreement") entered into with defendant Nexus Services, Inc. ("Nexus") on January 20, 2016, specifically obligating Nexus to provide RLI access to Nexus' books, records and accounts. The matter has been fully briefed, and the court held an evidentiary hearing on April 27, 2018. Per the parties' request, the court held its order in abeyance through May 17 to allow for settlement discussions. Following court-ordered mediation on May 30 and June 1, the court held a second evidentiary hearing to set an appropriate bond on June 7. For the reasons stated below, the court finds that: (1) the law and facts clearly favor RLI's position, and RLI is likely to succeed on the merits of some portion of its breach of contract action; (2) RLI is likely to suffer irreparable harm in the absence of a preliminary injunction; (3) the balance of the equities supports a preliminary injunction; and (4) a preliminary injunction is in the public interest. Accordingly, RLI's motion for preliminary injunction is GRANTED in part and DENIED in part, and Nexus is PRELIMINARILY ENJOINED from restricting RLI's access to the books, records and accounts specified below and in the accompanying order.

I.

This is a breach of contract dispute arising from an indemnity agreement between two corporations servicing immigration bonds. On January 20, 2016, RLI, an Illinois corporation, entered into the Indemnity Agreement as the surety with Nexus, a Virginia corporation. See Commercial Surety General Indemnity Agreement, Ex. A to Compl., ECF No. 1-2. The Indemnity Agreement served as consideration for RLI's agreement to issue immigration bonds, which included bonds conditioned upon delivery of an alien, bonds conditioned upon voluntary departure of alien, and order of supervision bonds.¹ Pursuant to ¶ 3(c) of the Indemnity Agreement:

Until Surety has been furnished with conclusive evidence of its discharge without loss from any Bonds, and until Surety has been otherwise fully indemnified as hereunder provided, Surety shall have the right of access to the books, records and accounts of the Indemnitor(s) for the purpose of examining and copying them. The Indemnitor(s) hereby authorize third parties, including but not limited to depositories of funds of theIndemnitor(s), to furnish to Surety any information requested by Surety in connection with any transaction. Surety may furnish any information, which it now has or may hereafter acquire concerning the Indemnitor(s), to other persons, firms or entities for the purpose of procuring co-suretyship or reinsurance or of advising such persons, firms, or entities as it may deem appropriate.

ECF No. 1-2, at 3 (emphasis added). Illinois law governs the Indemnity Agreement. See id., at 3. RLI alleges issuing more than 2,400 bonds in reliance upon the Indemnity Agreement, with at least 2,197 bonds remaining in force at the time of the April 27, 2018 hearing.

Approximately one year after signing the Indemnity Agreement, RLI asked Nexus for access to its records for the first time. Through multiple letters and e-mails, RLI requested meetings to review Nexus' records of immigration bonds and expressed concerns about notices from Department of the Treasury ("Treasury") about past due invoices for the bonds. On March 13, 2017, after receiving no response to its record review request, RLI demanded full bond discharge or collateral pursuant to Paragraph 3.d of the Indemnity Agreement. Nexus subsequently agreed to provide access to its documents for review during a meeting with RLI on May 26, 2017. While Nexus provided some records, not all records were provided and RLI claims that it lacked sufficient information to close its corresponding bond files. The parties again met on December 12, 2017, and Nexus informed RLI that it would only provide access to records pursuant to a confidentiality agreement. Without waiving its rights, RLI agreed to negotiate a confidentiality agreement with Nexus. Because the parties could not agree to a set of terms, Nexus continued to deny access.

During these negotiations, the business relationship worsened. RLI claims Nexus failed to contemporaneously inform them of dealings with Department of HomelandSecurity ("DHS"), provide conclusive evidence of discharge without loss from bonds, or comply with specific requests for information. The Treasury notified RLI of past due payments and made monetary demands with interest on outstanding bonds. Although the parties dispute whether RLI should have made the payments, RLI paid $83,874.14 for unsatisfied bond claims because Nexus allegedly failed to demonstrate that it had paid the claims. RLI states that these notices have been increasing in frequency. As a result of these Treasury notices and late payments, RLI fears that its relationship with the government has been undermined. Specifically, RLI worries that similar demands for past due payments will continue based on the higher-than-expected number of bonds remaining outstanding, and its reputation will be harmed because continued delinquencies could be reported to the Treasury or ultimately the Department of Justice's collection department. RLI is not aware of any repercussions from the Treasury to date. However, RLI claims that its concerns are bolstered by the multiple investigations into Nexus by state attorneys general, and by Nexus' repayment schedule for another surety's bonds that require payments of $30,000 to $35,000 per day by certified check. Nexus asked RLI if it was interested in engaging in a similar repayment plan, which caused RLI to question the number of its bonds in breach and Nexus' solvency.

Nexus, for its part, claims that it is willing to comply with the Indemnity Agreement, but needs to protect the privacy of its immigration clients. Nexus also claims that it is financially viable and that RLI should not be concerned, stating that its financial arrangements with other sureties are standard business practice. RLI, in Nexus' view, has been unreasonable in its demands to review books, records and accounts and for collateral.

RLI brought suit against Nexus on April 12, 2018, seeking injunctive relief, specific performance, and breach of indemnity agreement. ECF No. 1. On the same day, RLI moved for a preliminary injunction on the grounds that Nexus defaulted under the Indemnity Agreement by refusing to comply with RLI's requests to inspect Nexus' books and records for more than a year. ECF No. 4-1. RLI claims irreparable injury through the denial of its bargained-for contractual right to inspect documents, which prevents it from assessing and protecting itself against the outstanding bond liability, and the loss of goodwill that follows from Nexus' continued failure to make timely bond payments. RLI now seeks access to Nexus' books, records and accounts, and those of its related entities, within seven days. RLI requests an extensive assortment of documents, including all records related to the immigration bonds, financial records, tax notices, historical data about bonds, and information about the bonded aliens.

The court held a hearing on the motion for preliminary injunction on April 27, 2018. Both parties presented witnesses from their respective companies: RLI Vice President of Claims Ira Sussman and Nexus Vice President of Risk Management Eric Schneider. Although the parties disputed the nature of most of their business relationship, Nexus agreed at the hearing that RLI had a right of access to at least some of its financial documents per the Indemnity Agreement. The court took the motion under advisement for ten days to allow the parties to negotiate the terms of accessing Nexus' records. ECF No. 15. On May 9, 2018, the parties jointly moved the court to hold its preliminary injunction order in abeyance per further negotiations. ECF No. 28. The court granted the request through May 17, 2018. ECF No. 29. On the night of May 17, the parties notified the court that noagreement had been reached. ECF Nos. 30-31. RLI claimed that Nexus provided no financial records as of 4:00 p.m. on May 17, and solely provided documents that Nexus previously received from RLI or its bond producer. See Letter from Vivian Katsantonis, May 17, 2018, ECF No. 30. Nexus responded that it had provided more than 9,000 documents; nearly 7,000 pages of immigration records were produced on May 14, 2018 and more than 2,000 pages were produced after 4:00 p.m. on May 17, including asset lists, receipts, invoices, general ledgers, payroll account and salary information, profit and loss documents, vendor balance detail, and its 2016 federal tax return. See Letter from Dale G. Mullen, May 17, 2018, ECF No. 31. Upon reviewing the letters from the parties, the court ordered the parties to engage in mediation with the U.S. Magistrate Judge. ECF No. 32. The parties were unable to come to terms.

The court thereafter held an evidentiary hearing on June 7, 2018 for purposes of taking evidence related to an appropriate bond amount. ECF No. 43. The parties did not present evidence for an appropriate bond amount, but provided further argument. RLI introduced new evidence regarding Nexus' solvency through the testimony of Peter Fascia, a forensic accountant at Matson, Driscoll & Damico LLP. Fascia testified that he had difficulty assessing Nexus' financial state based on the information provided to date, explaining how the nearly $44 million in total income for the 2017...