RLI Ins. Co. v. Nexus Servs. Inc.

• Decision Date: 03 July 2020
• Docket Number: Civil Action No. 5:18-cv-66
• Citation: 470 F.Supp.3d 564
• Parties: RLI INSURANCE COMPANY, Plaintiff, Counterclaim Defendant, v. NEXUS SERVICES INC., et al., Defendants, Counterclaim Plaintiffs.
• Court: U.S. District Court — Western District of Virginia

470 F.Supp.3d 564

RLI INSURANCE COMPANY, Plaintiff, Counterclaim Defendant,

v.NEXUS SERVICES INC., et al., Defendants, Counterclaim Plaintiffs.

Civil Action No. 5:18-cv-66

United States District Court, W.D. Virginia, Harrisonburg Division.

Signed July 3, 2020

Albert L. Chollet, III, Pro Hac Vice, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Nashville, TN, Brian C. Padove, Pro Hac Vice, John Edward Sebastian, Pro Hac Vice, Watt, Tieder, Hoffar & Fitzgerald, LLP, Chicago, IL, Christopher Matthew Harris, Vivian Katsantonis, John Francis Finnegan, III, Watt, Tieder, Hoffar & Fitzgerald, LLP, McLean, VA, for Plaintiff, Counterclaim Defendant.

Annemarie DiNardo Cleary, Anthony F. Troy, Benjamin Aaron Beliles, Eckert Seamans Cherin & Mellott LLC, Richmond, VA, Christopher K. Kowalczuk, Attorney at Law, Roanoke, VA, Daniel Ari Glass, Pro Hac Vice, Jeffrey Paul Brundage, Eckert Seamans Cherin & Mellott, LLC, John M. Shoreman, McFadden & Shoreman, Washington, DC, Mario Bernard Williams, NDH LLC, Mary Donne Peters, Pro Hac Vice, Gorby Peters & Associates, LLC, Atlanta, GA, for Defendant, Counterclaim Plaintiff Nexus Services, Inc.

Christopher K. Kowalczuk, Attorney at Law, Roanoke, VA, John M. Shoreman, Pro Hac Vice, McFadden & Shoreman, Washington, DC, Mario Bernard Williams, NDH LLC, Atlanta, GA, for Defendants, Counterclaim Plaintiffs Libre by Nexus, Inc., Homes by Nexus, Inc.

MEMORANDUM OPINION

Michael F. Urbanski, Chief United States District Judge

This breach of contract case concerns the relatively straightforward obligations of a bond surety, RLI Insurance Company ("RLI"), and an indemnitor, Nexus Services, Inc. ("Nexus")¹ , under the terms of a standard Commercial Surety General Indemnity Agreement ("Indemnity Agreement"). See Ex. A to Compl., ECF No. 1-2. This case is before the court on cross motions for summary judgment. See Nexus's Motion for Partial Summary Judgment, ECF No. 422, and RLI's Motion for Summary Judgment, ECF No. 423. The court heard argument on the cross motions for summary judgment on April 10, 2020.

Unlike the familiar bond dispute in the construction or other commercial context in which the surety and principal relationship is relatively easy to quantify and define, the wrinkle in this case is that it involves nearly 2,500 immigration bonds concerning individual immigrant detainees. As such, this is not a case about a handful of bonds and bond principals as to which breach and liability are readily ascertainable. Rather, this case involves thousands of individual bonds issued to secure the appearance of individual immigrant detainees at Department of Homeland Security ("DHS") immigration proceedings and Nexus's obligations under the Indemnity Agreement to indemnify RLI for losses it sustains associated with breaches of those bonds by the individual principals and to provide collateral security to protect RLI against claims and exposure on those bonds.²

There are four sets of issues the court must address at summary judgment. First, the court must address issues of contract interpretation, principally concerning Nexus's obligations to provide collateral security. Second, the court must determine whether there is any genuine issue of material fact as to Nexus's breach of the Indemnity Agreement. Third, the court must address the legal sufficiency of Nexus's affirmative defense and counterclaim for breach of the implied covenant of good faith and fair dealing. Fourth, the court must assess RLI's claim for damages.

In summary fashion, the court concludes that RLI has established that Nexus materially breached the Indemnity Agreement and that it is entitled to specific performance; Nexus's affirmative defense and counterclaim as to the implied covenant of good faith and fair dealing do not meet the rigorous standard required by Illinois law; and an evidentiary hearing is necessary to permit the court to order specific performance.³ For specific performance purposes, an evidentiary hearing is necessary to quantify the reasonable amount of collateral security to be deposited under ¶ 3.d. and the reasonable amount to be paid RLI for losses under ¶ 2.a.(i) and claims under ¶ 2.a.(ii) of the Indemnity Agreement.

Accordingly, the court GRANTS in part and DENIES in part each side's motions for summary judgment. ECF Nos. 422 and 423.

• As detailed herein, the court GRANTS RLI's motion for summary judgment on its breach of contract claim and specific performance of ¶¶ 2.a.(i), 2.a.(ii), and 3.c. of the Indemnity Agreement. The court will determine the reasonable amount of RLI's "losses, costs, damages, attorneys' fees and expenses at an evidentiary hearing.⁴

• As regards ¶ 3.d. of the Indemnity Agreement, the court GRANTS RLI specific performance of ¶ 3.d. of the Indemnity Agreement for collateral security sufficient to cover its exposure for the immigration bonds issued for participants in the Nexus program in a reasonable amount to be determined at the evidentiary hearing. The court DENIES RLI's request to order the deposit of $10 million in collateral security as the court cannot conclude, based on the record developed to date, that such an amount is reasonable.

The court GRANTS RLI's motion for summary judgment as to Nexus's counterclaim, ECF No. 240, which is dismissed.

I. FACTUAL AND PROCEDURAL BACKGROUND

This is a breach of contract dispute over an Indemnity Agreement concerning immigration bonds. Immigration bonds are provided to the United States government, through the DHS, as security for the release of a detained alien from custody. Each immigration bond typically guarantees that the alien will be delivered to DHS custody upon demand. In this case, at Nexus's request, RLI issued thousands of bonds securing the delivery of individual immigrant principals. As surety, RLI was the obligor on the bonds to the obligee, DHS, assuring the delivery of the bond principal to DHS. Should a bond principal fail to appear as noticed, RLI was required to pay DHS a penal sum, averaging around $10,000 per bond. RLI had no prior experience with immigration bonds⁵ and it contends that it took on this new line of business in reliance on Nexus's track record of monitoring and delivering immigrant bond principals. In particular, RLI asserts that Nexus represented that it had a bond failure rate of less than 2 percent, and that it employed proven tools to mitigate the risk of breach, including GPS monitoring and highly selective screening and scoring of bond applicants. See RLI June 5, 2015, June 26, 2015, Nov. 6, 2015 and Feb. 11, 2016 emails, ECF Nos. 428-22, 428-23, 428-25 and 428-24. In all, RLI issued 2,486 bonds for Nexus program participants, with approximately 1,769 bonds still in force. ECF No. 423, at 4. The aggregate penal sum of the bonds issued exceeded $30 million, $22 million of which remains extant. Id.

As consideration for the issuance of these bonds, Nexus paid RLI roughly $2.6 million in premiums, and RLI required Nexus to indemnify if from all loss associated with the bonds. Nexus and RLI executed both the Indemnity Agreement and a Collateral Agreement on January 20, 2016.⁶

RLI claims breach of three provisions of the Indemnity Agreement regarding Nexus's obligations to provide access to its books and records, indemnify its losses and deposit collateral security. The relevant provisions of the Indemnity Agreement are as follows:

2. INDEMNITY

a. Indemnitor(s) agree to pay Surety upon demand:

(i) all losses, costs, damages, attorneys' fees and expenses of whatever kind or nature which arise by reason of, or in consequence of, the Surety having executed any Bond on behalf of the Principal, or in enforcing this agreement against any of the Indemnitor(s) or in procuring or attempting to procure its release from liability or a settlement under any Bond.

(ii) an amount sufficient to discharge any claim made against Surety on any Bond. This sum may be used by Surety to pay such claim or be held by Surety as collateral security against loss on any Bond.

3. GENERAL PROVISIONS

c. 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 the Indemnitor(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.

d. Surety shall have every right, defense, and remedy allowed by law including the rights of exoneration and subrogation. Indemnitor(s) will, upon the request of the Surety, procure the discharge of Surety from any Bond and all liability by reason thereof. If such discharge is unattainable, Indemnitor(s) will, if requested by Surety, either deposit collateral with Surety, acceptable to Surety, sufficient to cover all exposure under such Bonds or Bonds, or make provisions acceptable to Surety for the funding of the bonded obligations(s).

ECF No. 1-2, at 2-3. The Indemnity Agreement provides that it is governed by Illinois law. Id. at 3.

While the parties differ as to what the Indemnity Agreement requires, the facts regarding RLI's various demands that Nexus deposit collateral security are not in dispute. At the time RLI and Nexus entered into the Indemnity Agreement, they signed a separate Collateral Agreement and Receipt. Chilson Dep., ECF No. 422-8, at 20; see ECF No. 428-27. Initially, Nexus agreed to deposit $500,000 in collateral in five monthly installments under the Collateral Agreement. Id. On June 20, 2015, Nexus's Rick Nagel...