Selective Ins. Co. of Am. v. Envtl., Safety & Health, Inc., : 3:14-CV-531-TAV-CCS

• Court: United States District Courts. 6th Circuit. Eastern District of Tennessee
• Writing for the Court: Thomas A. Varlan CHIEF UNITED STATES DISTRICT JUDGE
• Docket Number: No.: 3:14-CV-531-TAV-CCS,: 3:14-CV-531-TAV-CCS
• Parties: SELECTIVE INSURANCE COMPANY OF AMERICA, Plaintiff, v. ENVIRONMENTAL, SAFETY & HEALTH, INC., WILLIAM GARIBAY, GO FISH LLC, and FIRST TENNESSEE BANK, Defendants.
• Decision Date: 03 March 2015

SELECTIVE INSURANCE COMPANY OF AMERICA, Plaintiff,
v.
ENVIRONMENTAL, SAFETY & HEALTH, INC., WILLIAM GARIBAY, GO FISH LLC, and
FIRST TENNESSEE BANK, Defendants.

No.: 3:14-CV-531-TAV-CCS

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF TENNESSEE AT KNOXVILLE

March 3, 2015

MEMORANDUM OPINION AND ORDER

This civil matter is before the Court on plaintiff Selective Insurance Company of America's ("Selective") Motion for Preliminary Injunction for Deposit of Collateral, Deposit of Proceeds of Bonded Contracts into Trust Account, and Access to Books and Records [Doc. 12], which was filed against defendants Environmental, Safety & Health, Inc. ("ESH"), William Garibay ("Garibay"), and Go Fish LLC ("Go Fish") (ESH, Garibay, and Go Fish, collectively, the "Indemnitors"). The Indemnitors did not file a response to the motion for injunctive relief, but together with plaintiff, submitted a proposed agreed order resolving the motion.¹ The other defendant in this action, First Tennessee Bank ("First Tennessee"), filed a response in opposition to the motion for injunctive relief [Doc. 19], and indicated its objection to the proposed order, asserting

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that the requested relief interferes with the bank's collateral rights. In connection with that response, First Tennessee also filed a motion to dismiss the claims against it [Doc. 13]. For the reasons explained below, and after careful consideration of the filings and relevant law, the Court will deny the motion to dismiss and grant the motion for injunctive relief.

I. Background

ESH has been engaged in the construction contracting business and was required to provide surety bonds in connection with its construction contracts [Doc. 7 ¶ 10]. On or about September 17, 2012, in consideration for, and in order to induce Selective to issue bonds on behalf of ESH, ESH, as principal, and Garibay, as indemnitor, executed a General Agreement of Indemnity in favor of Selective as surety (the "GAI") [Id. ¶ 11]. On or about June 13, 2013, Go Fish executed an Addendum to General Agreement of Indemnity Adding an Indemnitor, whereby Go Fish agreed to be bound to Selective in all respects as if Go Fish had signed the GAI (the "Addendum") [Id. ¶ 12].

According to Selective, by executing the Indemnity Agreement, the Indemnitors jointly and severally agreed to (1) provide Selective collateral equal in value to Selective's reserve, (2) deposit the proceeds of bonded contracts into a trust account designated/administered by Selective, and (3) provide Selective continuous/uninterrupted access to their books, records, accounts, and other information related to any bond and/or the Indemnitors' financial condition, credit worthiness, and assets [Id. ¶¶ 17, 23, 24].

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And the Indemnitors acknowledged that Selective may obtain injunctive relief compelling them to deposit collateral with Selective [Id. ¶ 18].

In addition, Selective asserts that the GAI imposes a number of other obligations upon the Indemnitors. For example, paragraph 3 of the GAI jointly and severally obligates the Indemnitors to "exonerate, indemnify and save harmless [Selective] . . . from and against any and all liability, loss, cost, damage and expense of whatsoever kind or nature" (including attorneys' fees) that Selective may sustain:

(1) by reason of having executed any Bond or other instrument or any renewal, modification, continuation, substitution or extension thereof,

(2) by reason of the failure of any one or more of the Indemnitors to perform or comply with the promises, covenants and conditions of [the indemnity] Agreement or,

(3) in enforcing any of the promises, covenants or conditions of [the indemnity] Agreement.

[Doc. 12-2 ¶ 2 ex. 1]. Paragraph 3 also clarifies that the Indemnitors' indemnity obligations extend to any payment Selective makes under the belief that "(1) [Selective] was or might be liable therefore or (2) the payments were necessary or advisable to protect any of [Selective]'s rights or to avoid or lessen [Selective]'s liability or alleged liability" [Id.].

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In reliance upon the Indemnitors' execution of the GAI, Selective issued the following bonds on behalf of ESH (the "bonds"):

Issue Date	Bond Description	Penal Sum	Obligee	Project
September 24, 2013	Contract Payment and Performance Bond No. B1135318	$639,431.41	Tennessee Department of Transportation	TDOT Contract No. CNM934
October 25, 2013	Performance Bond No. B1137437	$903,030	Army Corps of Engineers	Nashville District Intake Head Gate Repair Center Hill Dam
October 29, 2013	Contract Bond No. B1136977	$1,168,580	Tennessee Department of General Services	Campground Upgrades, Panther Creek State Park, Morristown, Hamblen County, Tennessee
December 27, 2013	Payment Bond No. B113890	$233,293	Lenoir City Utility Board	C Street Water Line Relocation Project, Lenoir City, Tennessee

[Doc. 12-2 ¶ 4]. Selective alleges that the Indemnitors have (a) failed to pay subcontractor/suppliers relative to the contracts covered by the bonds (collectively, the "bonded contracts"), (b) failed to exonerate, indemnify and save Selective harmless relative to the bonds and/or the bonded contracts, (c) failed to deposit any collateral with Selective, and (d) failed to provide Selective meaningful access to their books, records, accounts, etc., each of which constitutes a material breach of the GAI [Id. ¶ 5]. And in

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further breach, Selective avers that ESH has been instructing its subcontractors/suppliers to seek payment from Selective under the bonds [Id.].

Upon information and belief, Selective alleges that the Indemnitors have also used proceeds of the bonded contracts for purposes other than satisfaction of the conditions of the bonds. Particularly, Selective asserts that First Tennessee has accepted and/or directed ESH to use proceeds of the bonded contracts to pay debts purportedly owed to First Tennessee with knowledge that ESH held those funds in trust [See Doc. 7 ¶¶ 37-39, 48-49, 56-57, 65-66].

II. First Tennessee's Motion to Dismiss [Doc. 13]

Selective asserts that First Tennessee is liable for conversion because First Tennessee wrongfully exercised its purported setoff rights against the bonded contract proceeds in ESH's account with First Tennessee and/or wrongfully applied those funds to debts purportedly owed to First Tennessee with knowledge that ESH held those funds in trust for the benefit of Selective and ESH's subcontractors and suppliers on bonded projects and/or that those funds were deposited for the statutorily/contractually mandated payment of ESH's subcontractors and suppliers on bonded projects [Doc. 7 ¶¶ 121-129; Doc. 26 p. 1]. First Tennessee counters that Selective has failed to state a claim for conversion because the bonded contract proceeds are not, in fact, trust funds, and even if they are trust funds, First Tennessee had the right to setoff [See Docs. 14, 27].

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A. Motion to Dismiss Standard of Review

Federal Rule of Civil Procedure 8(a)(2) sets out a liberal pleading standard, Smith v. City of Salem, 378 F.3d 566, 576 n.1 (6th Cir. 2004), requiring only "'a short and plain statement of the claim showing that the pleader is entitled to relief,' in order to 'give the [opposing party] fair notice of what the . . . claim is and the grounds upon which it rests,'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Detailed factual allegations are not required, but a party's "obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions." Twombly, 550 U.S. at 555. "[A] formulaic recitation of the elements of a cause of action will not do," neither will "'naked assertion[s]' devoid of 'further factual enhancement[,]'" nor "an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555, 557).

In deciding a Rule 12(b)(6) motion to dismiss, a court must construe the complaint in the light most favorable to the plaintiff, accept all factual allegations as true, draw all reasonable inferences in favor of the plaintiff, and determine whether the complaint contains "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570; Directv, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007) (citation omitted). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. "Determining whether a complaint states a

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plausible claim for relief will [ultimately] . . . be a context-specific task that requires th[is Court] to draw on its judicial experience and common sense." Id. at 679.

B. Conversion Claim

"[C]onversion 'is the appropriation of another's property to one's own use and benefit, by the exercise of dominion over the property, in defiance of the owner's right to the property.'" VRF Eye Specialty Grp., PLC v. Yoser, 765 F. Supp. 2d 1023, 1032 (W.D. Tenn. 2011) (quoting Ralston v. Hobbs, 306 S.W.3d 213, 221 (Tenn. Ct. App. 2009)). Conversion is an intentional tort, and a party seeking to make out a prima facie case of conversion must prove the following: (1) the appropriation of another's property to one's own use and benefit; (2) by the intentional exercise of dominion over it; (3) in defiance of the true owner's rights. Royal v. Select Portfolio Servicing, Inc., No. 11-2214-STA-dkv, 2012 WL 174950, at *5 (W.D. Tenn. Jan. 20, 2012) (citations omitted).

First Tennessee takes issue only with the last element required to state a claim for conversion; that is, defying the true owner's rights. It asserts that "unless Selective's allegations establish that Selective was the 'true owner' of the funds at issue with an immediate and superior right of possession at the time of First Tennessee's...