450 F.Supp.3d 1043
D. Haw.2020Background:
- Ohana Control Systems (principal), controlled by Borochov and with Kinjo as an owner, contracted with the State of Hawaii to install fire alarm systems at public schools; the State required performance bonds.
- Philadelphia Indemnity issued those performance bonds conditioned on a General Indemnity Agreement in which Ohana, Borochov, and Kinjo agreed to indemnify Philadelphia and to post collateral on demand while claims against the bonds were investigated.
- The State declared Ohana in breach on three projects (Dole Middle, Mililani Middle, Benjamin Parker Elementary); the State hired Wasa, which billed over $1.3 million to complete/redo work; the combined penal sums of the three bonds totaled $698,515.
- Philadelphia investigated, concluded it might face exposure up to the penal sums, and demanded collateral; defendants refused. Philadelphia sued for breach of the indemnity agreement; a jury found breach (award $20,260.93 for indemnification costs) and also found a breach of the collateral clause but reserved remedy to the court.
- Post-trial, Philadelphia moved for specific performance (ordering deposit of cash collateral). The court held that specific performance is the appropriate equitable remedy for breach of a collateral-security clause and ordered defendants to post $698,515 in cash collateral and entered judgment for Philadelphia.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Entitlement to specific performance of collateral clause | Specific performance is the appropriate equitable remedy for failure to post collateral; remedy to be decided by court post-trial | Jury should have determined collateral amount; alternative: relief must have been pled | Court: Specific performance is equitable; court (not jury) decides remedy; defendants consented to post-trial resolution and are judicially estopped/waived from contesting procedure |
| Proper forum/timing for collateral amount | Court should set amount after jury found breach; post-trial motion is proper | Collateral amount was a factual question for jury; plaintiff didn’t plead specific performance | Court: Parties agreed jury would not award damages for collateral breach; Rule 15(b) and consent allow post-trial remedy; no pleading defect bars relief |
| Reasonableness of collateral amount demanded ($698,515) | Demand equals the bonds’ penal sums and is commensurate with State’s $1.3M claim; reasonable while investigation ongoing | Demand is excessive; actual cost to complete was much lower (e.g., expert estimate $248k) or claim is frivolous; many asserted damages fall outside bond scope | Court: Collateral demand reasonable because claim not plainly frivolous and exposure could reach penal sums; ordered posting of $698,515 in cash |
| Status of other equitable claims (quia timet, foreclosure, unjust enrichment) | N/A (plaintiff sought collateral and other relief) | N/A | Court: Other equitable claims withdrawn or moot; Count III (quia timet) dismissed as moot; judgment entered in plaintiff’s favor |
Key Cases Cited
- Safeco Ins. Co. of Am. v. Schwab, 739 F.2d 431 (9th Cir. 1984) (surety entitled to collateral security and specific performance to protect bargained-for security)
- New Hampshire v. Maine, 532 U.S. 742 (2001) (judicial estoppel doctrine; factors for application)
- Ah Quin v. County of Kauai Department of Transportation, 733 F.3d 267 (9th Cir. 2013) (factors informing judicial estoppel application)
- Russell v. Rolfs, 893 F.2d 1033 (9th Cir. 1990) (judicial estoppel/estoppel effects on litigation positions)
- Lee v. Aiu, 936 P.2d 655 (Haw. 1997) (specific performance is an equitable remedy/remedy issue for the court)
- Discovery Bay Condominium Association v. United Pacific Insurance Co., 884 P.2d 1134 (Haw. 1994) (surety’s duty of good faith and fair dealing in performance bond context)