Buddy Systems, Inc. v. Exer-Genie, Inc.

• Decision Date: 27 September 1976
• Docket Number: INC,EXER-GENI,No. 74-1639,74-1639
• Citation: 545 F.2d 1164
• Parties: BUDDY SYSTEMS, INC., a California Corporation, Plaintiff-Appellee, v., a corporation, and E. E. Holkesvick, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1164

545 F.2d 1164

BUDDY SYSTEMS, INC., a California Corporation, Plaintiff-Appellee, v. EXER-GENIE, INC., a corporation, and E. E. Holkesvick Defendants-Appellants.

No. 74-1639.

United States Court of Appeals Ninth Circuit.

Sept. 27, 1976.

Rehearing and Rehearing En Banc Denied Nov. 4, 1976.

Charles E. Wills (argued), of Wills, Green & Mueth, Los Angeles, Cal., for defendants-appellants.

V. J. McAlpin (argued), of McAlpin, Doonan & Seese, Covina, Cal., for plaintiff-appellee.

Before ELY and WALLACE, Circuit Judges, and RENFREW, ^* District Judge.

WALLACE, Circuit Judge:

Exer-Genie, Inc., and Holkesvick (Exer-Genie) appeal from a judgment awarding damages to Buddy Systems, Inc., for the wrongful issuance of a preliminary injunction obtained by Exer-Genie in a prior action. The issue we must decide is whether a district court may entertain jurisdiction pursuant to28 U.S.C. § 1352 ¹ over a suit on an injunction bond after the bond has been exonerated. We hold that the district court was without jurisdiction to hear this suit and therefore reverse.

I

In 1968 Exer-Genie brought suit against Buddy Systems and several other defendants for infringement of a patent used in the manufacture of an exercise device. Exer-Genie moved for a preliminary injunction in order to restrain Buddy Systems from making or selling a competitive exercise device. The preliminary injunction was granted on the condition that Exer-Genie post security in the amount of $100,000. ² Exer-Genie filed a certificate of deposit and the district court issued a writ of injunction. Buddy Systems did not appeal from the issuance of the preliminary injunction.

After a trial on the merits, the district judge found that Exer-Genie's patent was valid and had been infringed and therefore made the preliminary injunction permanent. He concluded that "(t)he preliminary injunction was lawfully and regularly issued by the Court and therefore the plaintiffs (pursuant to their request) are entitled to have exonerated the security which they posted."

Buddy Systems objected to the exoneration of the security before the time for appeal had expired. The district judge afforded Buddy Systems an opportunity to submit in writing any authority it might have in support of its objection, but Buddy Systems failed to do so. The final judgment ordered the injunction bond exonerated.

On appeal, we reversed the district court's judgment and held that Exer-Genie's patents were invalid. Exer-Genie, Inc. v. McDonald, 453 F.2d 132 (9th Cir. 1971), cert. denied, 405 U.S. 1075, 92 S.Ct. 1498, 31 L.Ed.2d 809 (1972). Buddy Systems did not challenge the exoneration of the bond as premature and erroneous and we did not reach that issue on appeal.

After our decision, Buddy Systems filed the present suit to recover damages for the wrongful issuance of a preliminary injunction, invoking 28 U.S.C. § 1352 as the sole jurisdictional basis for its suit. It then moved to compel Exer-Genie to redeposit the security which had been released earlier. The motion was denied and the trial proceeded with no bond in existence. A judgment was entered awarding $35,000 damages to Buddy Systems.

Exer-Genie raises several issues in its appeal from this second judgment. We need consider only one: whether the district court had subject matter jurisdiction over the suit pursuant to section 1352. Since we answer this question in the negative, we need not reach the remaining issues.

Section 1352 grants jurisdiction to hear an "action on a bond" executed pursuant to Rule 65(c), Fed.R.Civ.P. (security required for issuance of preliminary injunction). In this case, the simple fact is that the bond had been exonerated; therefore, there was no bond upon which an action could be brought. To overcome what appears to be obvious, the district court employed a fiction. It concluded that a bond and the security are distinguishable and that here the bond continued in existence after the security was discharged upon exoneration. Buddy Systems adds a different theory on appeal. It concludes that once a bond is executed, any district court may later entertain jurisdiction over an action for wrongful issuance of an injunction, regardless whether the bond has been exonerated. Neither theory supports jurisdiction.

II

The district court reasoned that a bond has two separate aspects: it involves (1) a promise to make the defendant whole in case the preliminary injunction is improperly granted and damages result and (2) the deposit of security from which payment for any damages will be obtained. The promise continues to be enforceable even after the security is exonerated, the court argued, and a suit on the promise is a suit "on a bond" within he meaning of section 1352. This theory has a superficial plausibility, but it finds little support in history or authority.

While we hesitate to resurrect ancient law, common law history is instructive. The practice of giving tangible items as security, called "gage," in order to acquire credit arose before any consensual theory of contract obligation emerged. The creditor took possession of the gage and retained it until he was repaid. But there was no underlying duty on the part of the debtor if he failed to pay, the creditor held the security, but had no action on the debt. A surety was referred to as a "pledge," and was at first literally "an animated gage . . . delivered over to slavery but subject to redemption." 2 F. Pollock & F. Maitland, The History of English Law 185-86 (2d ed. 1899).

Although these devices were used for a number of purposes, they also served a role very similar to that of the Rule 65 injunction bond involved in this case. For example, at early common law the plaintiff in a replevin action against a distrainor was required to give "gage and pledge" i. e., a surety's bond. Id. at 577; see Dobbs, Should Security be Required as a Pre-Condition to Provisional Injunctive Relief?, 52 N.Car.L.Rev. 1091, 1093 (1974).

At later common law, a bond was a sealed and delivered instrument binding the obligor to pay a sum of money. 1A A. Corbin, Contracts, § 258, at 455 (1963). It did not need to be supported by consideration. 12 Halsbury's Laws of England § 1400 (4th ed. 1975). While common law bonds may be used for many purposes, including security for the performance of independent obligations, see id. § 1387, the term "bond" does not refer to the duty whose performance is secured, but only to the security itself. See id. § 1385. ³

Thus even if a duty independent of the security posted under Rule 65 can be implied, the district court's theory that a suit to enforce that duty is an action "on a bond" finds no justification in common law bond history. This was the construction given to section 1352 in United Bonding Insurance Co. v. Alexander, 413 F.2d 1025, 1026 (5th Cir. 1969), where the court held that an action by the obligor on a fidelity bond against the principal for breach of a duty implied by the bond was not a suit "on a bond" within the meaning of section 1352. Thus we conclude that there is no jurisdiction under section 1352 over a suit on any alleged promise independent of the security instrument.

But more importantly, no underlying duty to recompense the victim of wrongful provisional relief independent of the security instrument may be implied. It is a well-settled rule that there can be no recovery for damages sustained by a wrongful issuance of a preliminary injunction in the absence of a bond, Russell v. Farley, 105 U.S. 433, 437, 26 L.Ed. 1060 (1881); Benz v. Compania Naviera Hidalgo, S.A., 205 F.2d 944, 947-48 (9th Cir.) (on petition for rehearing), cert. denied, 346 U.S. 885, 74 S.Ct. 135, 98 L.Ed. 389 (1953), unless the defendant sues for malicious prosecution or on a theory of unjust enrichment, Northern Oil Co. v. Socony Mobil Oil Co., 347 F.2d 81, 83 (2d Cir. 1965); 11 C. Wright & A. Miller, Federal Practice and Procedure § 2973, at 652 (1973); see Note, Greenwood County v. Duke Power Co., 7 U.Chi.L.Rev. 382 (1940). If a bond is posted, liability is limited by the terms of the bond or the order of the court that required the posting. See 11 Wright & Miller, supra, § 2973, at 652; Comment, The Triggering of Liability on Injunction Bonds, 52 N.Car.L.Rev. 1252, 1258 (1974). ⁴ The district court's theory that a duty in addition to those created by the court's order may be implied is directly opposed to these settled rules. ⁵

Furthermore, we do not find any special circumstances in this case to justify a departure from these settled rules. The district judge conditioned the preliminary injunction "(u)pon the giving of security" in the form of "a corporate surety bond, or by a treasury bond or a certificate of deposit payable to Clerk." Exer-Genie submitted a certificate of deposit. There was nothing said about any independent promise. After trial, the district court ordered that the security be returned to Exer-Genie without any qualification or condition at all. The court specifically rejected Buddy Systems' plea that the security be retained pending appeal. This order completely discharged the relationship the district court had previously established; there was nothing left upon which Buddy Systems could bring this action. See 11 Wright & Miller, supra, § 2973, at 652-53.

Neither do we find any support for the district court's theory in the language of Rules 65(c) ⁶ and 65.1. ⁷ The rules simply refer to "the giving of security" "in the form of a bond or stipulation or other undertaking." The statutory predecessors of Rule 65(c) likewise refer solely to a security device. ⁸ Thus we conclude that implied promise upon which the district court based liability is not a "bond" within the meaning of section 1352 and more importantly that no such promise is implied by a Rule 65 order to post security. Once the security is returned to the plaintiff there can no longer be a section 1352 action "on a bond." To the extent that Atomic...