Guzzetta v. Service Corporation of Westover
Hills, Del. Supr., No. 34, 2010 (Nov. 9, 2010), read
opinion here.
Issue Addressed
This short opinion addresses the rarely examined topic of the appropriate
amount of a bond that is required as a prerequisite for the imposition of
an injunction pursuant to Court of Chancery Rule 65(c).
Brief Summary
In a rare reversal of the Court of Chancery, on a topic even less commonly the
subject of judicial analysis, the Delaware Supreme Court examined the basis for
determining the amount of a bond which is provided by the party seeking an
injunction as a condition to the court granting injunctive relief. An
indication of the paucity of case law on this topic is the reliance by the
Court, in part, on a decision of the U.S. Court of Appeals for the Seventh
Circuit. Nonetheless, the issue decided is noteworthy for the key role that
bonds play in corporate litigation that seeks expedited injunctive relief.
A brief recitation of the procedural history of the case
is necessary in order to appreciate this ruling of Delaware's High Court. The
trial court entered a temporary restraining order and thereafter a preliminary
injunction. Shortly after being enjoined, the Guzzettas filed a motion pursuant
to Court of Chancery Rule 65(c), seeking security based on an itemized list of
potential damages. After a hearing by phone, the Court required the party
obtaining the injunction to post security in the amount of $5,000.
In response to a subsequent motion by the Guzzettas, the
trial court increased the bond to $10,000, although the Guzzettas
requested an increase in the amount of approximately $80,000, based on
proposed damages. After a final ruling, the trial court vacated the preliminary
injunction and awarded damages to the Guzzettas in the amount of the bond,
which was $10,000.
The only issue on appeal was whether the
trial court abused its discretion in setting the amount of the injunction bond.
The Supreme Court reviewed Court of Chancery Rule 65(c)
which requires a party seeking an injunction to give security for the payment
of costs and damages as may be incurred or suffered by any party who was found
to be wrongfully enjoined. The security is usually in the form of a bond and
fixes the amount that an enjoined party may recover. The damages available to a
party against whom an injunction was wrongly imposed, are those proximately
caused by the injunction, and must be proven by a preponderance of the
evidence.
Importantly, a wrongfully enjoined party has no recourse
other than the amount of the bond provided as security. Although the enjoined
party must still prove its damages, it cannot obtain damages in excess of the
amount of the bond.
Relying on a decision of the 7th Circuit Court of
Appeals, the Delaware Supreme Court reasoned that in determining the amount of
the bond in connection with granting injunctive relief, an "error in setting the
bond too high thus is not serious . . . unfortunately, an error in the other
direction produces irreparable injury because the damages for an erroneous
preliminary injunction cannot exceed the amount of the bond." (citing Mead
Johnson & Co. v. Abbott Laboratories, 201 F.3d 883, 888 (7th Cir.
2000)).
Even though the trial court was correct in rejecting the
full amount of damages claimed, such as the amount
sought by the Guzzettas for lost time away from work, after
excising the rejected categories of damages, the trial court still only set the
bond at $10,000. Although determining the amount of a bond is in the discretion
of the trial court, that discretion, as explained by the Supreme Court, must be
exercised in a manner consistent with the purpose of an injunction bond, which
is to protect a party that is wrongfully enjoined. Although the amount of the
bond does not entitle the enjoined party to any damages, the cost of the
bond is typically a very small fraction of its face value.
The Delaware Supreme Court explained that a proper
exercise of discretion "would then require that the Court explain its rationale
for setting a bond at an amount well below the enjoined party's credible
estimate of potential damages." The Supreme Court reversed in light of the
absence of an explanation for the amount of the bond in this case, and based on
its review of the record which did not indicate that the estimate
of damages sought by the Guzzettas was unreasonable.
Read more Delaware business
litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Fox Rothschild LLP.