Simulnet East Associates v. Ramada Hotel Operating Co., 92-16737

• Decision Date: 07 October 1994
• Docket Number: No. 92-16737,92-16737
• Citation: 37 F.3d 573
• Parties: SIMULNET EAST ASSOCIATES, a New York limited partnership d/b/a Simulnet L.P.; Cable/Mac Services, Inc., a New York corporation, general partner, Plaintiffs-Appellants, v. RAMADA HOTEL OPERATING COMPANY, a Delaware corporation; Jose L. Torres, an individual, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 573

37 F.3d 573

SIMULNET EAST ASSOCIATES, a New York limited partnership d/b/a Simulnet L.P.; Cable/Mac Services, Inc., a New York corporation, general partner Plaintiffs-Appellants, v. RAMADA HOTEL OPERATING COMPANY, a Delaware corporation Jose L. Torres, an individual, Defendants-Appellees.

No. 92-16737.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Feb. 11, 1994.

Decided Oct. 7, 1994.

J. Randall Jones and William L. Coulthard, Harrison, Kemp & Jones, Las Vegas, NV, for plaintiffs-appellants.

David N. Frederick, Lionel Sawyer & Collins, Las Vegas, NV, for defendants-appellees.

Appeal from the United States District Court for the District of Nevada.

Before: HUG, FARRIS, and O'SCANNLAIN, Circuit Judges.

HUG, Circuit Judge:

The sole issue in this diversity action is whether the district court abused its discretion in requiring, on the eve of trial, a $500,000 cost bond as a condition to proceeding to trial. The litigation had proceeded for three years without a demand for a cost bond. The district court granted defendants' motion for a bond five days before trial. When the plaintiffs were unable to post the bond, the district court dismissed the action. We hold that this was an abuse of discretion, and we reverse.

I.

Simulnet is the successor in interest to several agreements to provide satellite television services to 25 separate Ramada Hotel properties throughout the country. Simulnet sued Ramada under various legal theories, including breach of contract. The litigation progressed for three years, during which time there was extensive discovery generating some 4,000 documents. The district court denied Ramada's two motions for summary judgment, as well as its motion to dismiss.

At the pretrial conference five days before the scheduled trial, Ramada requested that the district court order Simulnet to post a cost bond for the fees and costs Ramada had thus far expended. Ramada contended it was entitled to a cost bond that included attorneys' fees because the contract provided that the prevailing party was entitled to attorneys' fees. In response to an inquiry by the district court, Ramada indicated that it had incurred attorneys' fees in the amount of $397,000, and costs of approximately $200,000. The district court then inquired as to whether Simulnet would be able to pay those fees and costs if Ramada prevailed in the litigation. Simulnet acknowledged that it was insolvent and would therefore be unable to pay the fees and costs incurred by Ramada in defending the suit. The district court subsequently ordered Simulnet to post a cost bond in the amount of $500,000 as a condition to proceeding to trial. Simulnet was unable to post the requisite bond, and the district court dismissed the action. Plaintiff appeals. Jurisdiction in the district court is based on 28 U.S.C. Sec. 1332; appellate jurisdiction is based on 28 U.S.C. Sec. 1291.

II.

There is no specific provision in the Federal Rules of Civil Procedure relating to security for costs. However, the federal district courts have inherent power to require plaintiffs to post security for costs. In re Merrill Lynch Relocation Management, Inc., 812 F.2d 1116, 1121 (9th Cir.1987). "Typically federal courts, either by rule or by case-to-case determination, follow the forum state's practice with regard to security for costs, as they did prior to the federal rules; this is especially common when a non-resident party is involved." 10 Wright, Miller & Kane, Federal Practice and Procedure: Civil 2nd Sec. 2671 (footnotes omitted). We review for abuse of discretion the district court's order requiring security for fees and costs. Montserrat Overseas Holdings, S.A. v. Larsen, 709 F.2d 22 (9th Cir.1983).

In response to Ramada's motion, the district court imposed the requirement of the $500,000 cost bond to ensure that Ramada would be compensated for fees and costs already incurred as a result of defending this litigation. The district court's requirement of the cost bond was based on the language of the contract that provided for recovery of attorneys' fees and costs to the prevailing party in the underlying contract dispute. The district court reasoned that because there was a "strong possibility" that the defendants would prevail on the dominant theory of the case, the requirement of the cost bond was appropriate.

The Nevada District Court has not adopted a court rule relating to security for costs but has, by case law, adopted the pertinent Nevada statute as the appropriate procedure, stating:

It has been the policy of the United States District Court for the District of Nevada to enforce the requirements of NRS Sec. 18.130 in diversity actions. This is also the general practice elsewhere. See Ilro Productions, Ltd. v. Music Fair Enterprises, 94 F.R.D. 76 (S.D.N.Y.1982); Keller Research Corp. v. Roquerre, 99 F.Supp. 964 (S.D.Cal.1951); Port Construction Company v. Virgin Islands Housing Authority, 284 F.Supp. 774 (D.V.I.1968).

Hamar v. Hyatt Corp., 98 F.R.D. 305, 305-06 (D.Nev.1983). See also Arrambide v. St. Mary's Hosp., Inc., 647 F.Supp. 1148, 1149 (D.Nev.1986) and Truck Ins. Exchange v. Tetzlaff, 683 F.Supp. 223, 227 (D.Nev.1988) (confirming the application of NRS Sec. 18.130 in diversity cases).

Nev.Rev.Stat. Sec. 18.130 provides in pertinent part:

18.130. When plaintiff may be required to secure costs; affidavits of sureties; dismissal of action if undertaking not filed.

1. When a plaintiff in an action resides out of state, or is a foreign corporation, security for the costs and charges which may be awarded against such plaintiff may be required by the defendant, by the filing and service on plaintiff of a written demand therefor within the time limited for answering the complaint. When so required, all proceedings in the action shall be stayed until an undertaking, executed by two or more persons, be filed with the clerk, to the effect that they will pay such costs and charges as may be awarded against the plaintiff by judgment, or in the progress of the action, not exceeding the sum of $500; or in lieu of such undertaking, the plaintiff may deposit $500, lawful money, with the clerk of the court, subject to the same conditions as required for the undertaking.....

2. A new or an additional undertaking may be ordered by the court or judge upon proof that the original undertaking is insufficient security, and proceedings in the action stayed until such new or additional undertaking be executed and filed.

The basic purpose for a cost bond is well-illustrated by the Nevada statute. It is imposed at the commencement of an action to secure future costs that the defendant may incur if the plaintiff is allowed to proceed. The initial request must be made within the time limit for answering the complaint. Only if the initial request is timely made can a defendant request additional security as the litigation progresses. Ramada admits it did not fulfill the requirements of Nev.Rev.Stat. Sec. 18.130 by filing its first request five days before trial. Thus, in order to uphold the requirement of the bond, we would have to ignore the existing case law precedent of the Nevada District Court and the common practice elsewhere, which is to apply the applicable state law.

Ramada contends, however, that

the District Court imposed its bond requirement, not because of any state of federal statute, but because plaintiffs assumed a contractual obligation to pay defendants' costs and attorney's fees should defendants prevail, there was a high probability defendants would prevail, and plaintiffs had caused defendants to incur nearly $600,000 in attorney's fees and costs without making any provision for satisfying their contractual obligation.

Ramada relies on our decision in Montserrat to support ...