979 F. Supp. 2d 1307
S.D. Fla.2013Background
- Surety (Developers Surety & Indemnity Co.) obtained a preliminary injunction requiring Bi‑Tech Construction and Rafael Aguado (Indemnitors) to post $205,000 collateral after Bi‑Tech defaulted on a $670,153.64 bonded contract with the City of Florida City.
- The City paid Bi‑Tech $219,896.82 on May 13, 2013; under the Indemnity Agreement those proceeds were held in trust for the Surety to pay subcontractors/suppliers.
- Bi‑Tech deposited the City payment into a Bank of America account, then transferred large sums to an undisclosed account and made post‑termination expenditures; subcontractors and suppliers (notably City Electric Supply Co.) remained unpaid.
- The Surety moved to enforce the injunction and to show cause for contempt after the Indemnitors failed to post collateral; Indemnitors repeatedly failed to appear at show‑cause hearings and produced limited documentation.
- The magistrate judge found the $219,896.82 were trust funds, concluded Indemnitors committed defalcation, fraud, and embezzlement, and recommended freezing Bank of America accounts, converting the injunction to a $219,896.82 partial judgment, awarding fees, and granting expedited discovery.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether City payment constituted trust funds under the Indemnity Agreement | Payment to Bi‑Tech ($219,896.82) are trust funds held for Surety and must be preserved to pay subcontractors/suppliers | Funds were not available or were used for legitimate business expenses; inability to raise required collateral | Held: Payment are trust funds under Article 4; Indemnitors had fiduciary obligations to Surety |
| Whether Indemnitors willfully violated the injunction and should be sanctioned / have assets frozen | Indemnitors knowingly diverted trust funds, transferred funds after notice and after injunction, and willfully disobeyed court orders | Non‑willful inability to raise funds; lack of funds | Held: Indemnitors intentionally and willfully violated the injunction; Bank of America accounts frozen and turnover ordered |
| Whether diversion/use of funds constituted defalcation, fraud, and embezzlement under § 523(a)(4) standards | Use of trust funds for overhead, loans, payments to insiders, and transfers to undisclosed account show defalcation, fraud, and embezzlement | Denied or failed to credibly prove that funds were paid to subcontractors; asserted other sources (line of credit, other projects) | Held: Evidence (and adverse inferences from nonappearance) shows defalcation, fraud, embezzlement; standard from Bullock applied and satisfied |
| Appropriate relief: convert injunction to partial judgment, discovery, fees | Convert injunction to partial judgment for $219,896.82, freeze assets, compel turnover, award attorneys’ fees, and allow expedited discovery to trace fraudulent conveyances | Opposed or failed to oppose effectively at hearings; sought more time/excuse of inability to pay | Held: Injunction converted to Partial Judgment for $219,896.82; accounts/assets frozen; expedited discovery ordered; Surety awarded attorneys’ fees and costs |
Key Cases Cited
- LoConte v. Dugger, 847 F.2d 745 (11th Cir.) (standard re: adoption of magistrate judge findings)
- RTC v. Hallmark Builders, Inc., 996 F.2d 1144 (11th Cir.) (review of magistrate findings and injunction enforcement)
- Smith Barney, Inc. v. Hyland, 969 F. Supp. 719 (M.D. Fla.) (discretion to fashion sanctions to ensure compliance with injunction)
- Alderwoods Group, Inc. v. Garcia, 682 F.3d 958 (11th Cir.) (injunction enforcement and contempt authority)
- Johnson v. Couturier, 572 F.3d 1067 (9th Cir.) (freezing assets and bank accounts via injunction)
- Pearlman v. Reliance Ins. Co., 371 U.S. 132 (U.S.) (surety’s equitable lien/trust in contract funds)
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (U.S.) (definition of defalcation under 11 U.S.C. § 523(a)(4))
- FTC v. Leshin, 618 F.3d 1221 (11th Cir.) (individuals may be held personally responsible for corporate noncompliance with injunctive orders)