FEDERAL INTERPLEADER DEALING WITH COMPETING CLAIMS OVER UNDISPUTED PAYABLE TO SUBCONTRACTOR

shutterstock_156272690What do you do if you are holding undisputed money owed to a subcontractor? Well, you make an effort to pay it or tender it!   Right?  I am never a fan of a client holding undisputed sums without a legitimate contractual basis.

 

There are circumstances, however, where the effort to pay an undisputed payable is not so easy.  In fact, it is challenging, as in the below case example where the subcontractor filed for an Assignment for the Benefit of Creditors (referred to as an “ABC”).  An ABC, in a nutshell, allows an insolvent entity to file an insolvency action in state court governed by state law and choose its assignee (versus a federal bankruptcy action governed by federal law where a trustee is appointed).  One major difference is that there is no automatic stay in an ABC as there is in a federal bankruptcy action.  Thus, the insolvent entity can still be sued, but, while that entity is in an ABC, there are many creditors that will not be able to enforce a judgment.  (See Florida Statute Ch. 727).

 

In Balfour Beatty Construction, LLC v. New Era Lending, LLC, 2017 WL 3971438 (MD.Fla. 2017), a general contractor on a pool swimming pool rehabilitation project at a large Disney hotel was holding approximately $100,000 from a subcontractor that instituted an ABC.   As a result of the ABC, the subcontractor’s subcontractors and suppliers and other creditors made a claim against this money.  (It is uncertain whether any of these entities had lien or payment bond claims.)   Due to the competing claims for the same money, the general contractor cleverly filed a federal interpleader action pursuant to 28 U.S.C. s. 1335 and Federal Rule of Civil Procedure 22.   The general contractor acknowledged that the money was an open payable owed to the subcontractor that filed an ABC, but due to the competing claims, did not know which subcontractor or supplier or creditor was owed which amounts.  Hence, the interpleader action, which has advantages when a party is holding undisputed sums subject to competing claims.

 

The federal interpleader statute [28 USC s. 1335] gives the district court jurisdiction of “any civil action of interpleader or in the nature of interpleader,” where the claimants are minimally diverse and the plaintiff has “any obligation written or unwritten to the amount of $500 or more …” 28 U.S.C. § 1335(a)(1). “Interpleader is the means by which an innocent stakeholder, who typically claims no interest in an asset and does not know the asset’s rightful owner, avoids multiple liability by asking the court to determine the asset’s rightful owner.” In re Mandalay Shores Co-op. Hous. Ass’n Inc., 21 F.3d 380, 383 (11th Cir. 1994). The well-pleaded allegations in the Second Amended Complaint establish that here, there is a single Fund [money or bond that was interpleaded with the court’s registry] that is the subject of adverse claims by Defendants. Balfour [innocent stakeholder] has also demonstrated that it is a disinterested stakeholder in that it makes no claim to the Fund, except for its attorney’s fees and the costs of this action. Accordingly, the Court finds that this interpleader action is properly brought.

Balfour Beatty, supra, at *5.

 

The general contractor knowing it owed the money cleverly filed the interpleader lawsuit depositing the undisputed sums or provided a bond conditioned on a future court order and sued all parties that have made a claim or could make a claim against the sums.   The contractor claimed no interest in the money except for its attorney’s fees and costs incurred in the action.  Notably, a plaintiff in an interpleader action, known as the innocent stakeholder, may, and oftentimes is as a matter if equity, awarded attorney’s fees and costs if the interpleader action is successful.  See Murphy v. Travelers Ins. Co., 534 F.2d 1155, 1164 (5th Cir. 1976) (“In fact, as a general rule, when an interpleader action is successful, the court often awards costs, as well as attorney’s fees, to the stakeholder.”) See also Aetna Life Ins. Co. v. Outlaw, 411 F.Supp. 824, 826 (D.Md. 1976) (“The theory behind the award of attorneys’ fees in interpleader actions…is that plaintiff by seeking resolution of the multiple claims to the proceeds benefits the claimants and that plaintiff should not have to absorb attorneys’ fees in avoiding the possibility of multiple litigation.”).

 

Additionally, the general contractor knew that by filing an interpleader action, it could also move for a contemporaneous injunction preventing all of the potential claimants from prosecuting an action pertaining to the undisputed sums:

 

 Title 28, United States Code, Section 2361 allows a district court to enter an order in an interpleader action “restraining [claimants] from instituting or prosecuting any proceeding in any State or United States court affecting the property, instrument or obligation involved in the interpleader action until further order of the court.” The district court has the authority to “discharge the plaintiff from further liability, make the injunction permanent, and make all appropriate orders to enforce its judgment.” . 

Balfour Beatty, supra, at 5 (citations omitted).

 

By moving for an injunction, the general contractor—the innocent stakeholder—could move the court for a temporary restraining order/injunction and then a permanent injunction preventing any existing or future action asserted against it for the recovery of the undisputed sums.

 

In this circumstance, and without knowing all of the nuances of the case, this strategy was extremely clever. By filling the interpleader action, the contractor had a basis to recover the attorney’s fees it incurred in dealing with competing claims and move for an injunction to prevent numerous, competing claims over the same money. 

 

Strategy is always important.  Always.  Here, the strategy not only worked, but it was clearly the most effective strategy based on the factual issues in the case in light of the subcontractor filing an ABC.  Good strategy is rewarded!

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

OBTAINING TEMPORARY INJUNCTION TO ENFORCE NON-COMPETE AGREEMENT

imagesWhen a party breaches a non-compete agreement (with a non-solicitation clause), the non-breaching party typically moves for a temporary injunction.   The breaching party is the party that signed the non-compete agreement, such as a former employee or consultant that agreed not to solicit its employer’s customer lists or referral sources upon leaving.  The non-breaching party or the party moving for the temporary injunction is the party that is looking to protect its trade secret customer lists or referral sources, such as the employer. 

 

 

In order to obtain a temporary injunction…[the non-breaching party is] required to establish (1) the likelihood of irreparable harm, (2) the unavailability of an adequate remedy at law, (3) a substantial likelihood of success on the merits, and (4) that the injunction will serve the public interest.”  Smart Pharmacy, Inc. v. Viccari, 41 Fla. L. Weekly D1274a (Fla. 1st DCA 2016).  Again, a party moving to enforce a non-compete agreement will and should move for a temporary injunction. 

 

In the recent case, Smart Pharmacy, an employer regarded its referral sources to be confidential trade secrets. The employer had its employee sign a non-compete agreement that precluded the employee from competing against its employer in a certain geographic area for two years upon the employee’s departure from the employer.  The non-compete agreement prevented the employee from soliciting its employer’s referral sources upon leaving (a non-solicitation clause).  The employee left and started soliciting the referral sources in violation of the non-compete agreement.  The employer sued the employee and the employee’s new employer and moved for a temporary injunction preventing them from soliciting the referral sources.   

 

In analyzing the four temporary injunction factors set forth above:

 

(1) Likelihood of Irreparable Harm

 

The violation of a non-compete agreement creates the presumption of likelihood of irreparable harm.  Thus, this factor is established.

 

(2) Inadequate Remedy of Law

 

An employer has an inadequate remedy at law for the irreparable harm because money damages in this context are difficult to prove with a reasonable degree of certainty and would not fully compensate the employer for a violation of a non-compete agreement. Thus, this factor is established. 

 

(3) Substantial Likelihood of Success

 

Soliciting customers of a business is a legitimate business interest.  An employee breaches a non-compete agreement that contains a non-solicitation clause when the employee solicits the customers or sources of his or her former employer, meaning the employer has a substantial likelihood of success. Thus, this factor is established. 

 

(4) Injunction will Serve the Public’s Interest

 

An injunction will serve the public’s interest since it would protect an employer’s legitimate business interest in protecting its customer lists and referral sources. Thus, this factor is established.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

DON’T MESS WITH THE GENERAL AGREEMENT OF INDEMNITY

untitledI have previously posted articles about the all mighty General Agreement of Indemnity (“Agreement of Indemnity”) that a surety requires a contractor bond-principal and designated guarantors to execute before issuing payment and performance bonds to the contractor. In cases forming the basis of the articles, the surety demands rights under the Agreement of Indemnity such as the right for collateral security to protect the surety from anticipated or pending claims and the contractor bond-principal refuses. In these cases, the surety files a lawsuit and moves for an injunction which, among other things, requires the principal to post the very collateral security it refused to post to begin with. As reflected in these cases, the surety gets the injunction granted because the Agreement of Indemnity is designed to protect the surety’s interests. In other words, don’t mess with the Agreement of Indemnity because the surety will typically get the recourse it pursues.

 

Recently, another opinion came out further supporting the rights of a surety under the Agreement of Indemnity and why it is beneficial to figure out an avenue to work with the surety instead of against it. In this case, Travelers Casualty and Surety Co. of America v. Design Build Engineers and Contractors Corp., 2014 WL 7274803 (M.D.Fla. 2014), the contractor bond-principal was working on two public projects. On one project, a dispute with a subcontractor resulted in a claim that the surety paid plus substantial attorney’s fees awarded to the subcontractor by the court. Although the contractor reimbursed its surety for the principal amount of the claim, it refused to reimburse the surety for the substantial attorneys’ fees awarded to the subcontractor. And, on the other project, the contractor was terminated resulting in pending performance bond and payment bond claims against the surety.

 

The contractor, in furtherance of trying to shield major property and assets, did some creative asset transfers forming holding companies, etc. This did not work.  The surety filed a lawsuit against the contractor and guarantors under the Agreement of Indemnity and moved for a preliminary injunction to require the contractor to post collateral security and to prevent the contractor from disposing of assets. Guess what? The surety prevailed on its motion for an injunction and the Middle District Court ordered that the contractor post the requested collateral that included properties the contractor tried to shield and prevented the contractor and certain holding companies it formed from disposing or encumbering of assets (inclusive of the real property is was ordered to post as collateral).

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

VALIDITY OF NON-COMPETE AGREEMENTS

imagesThe validity of a non-compete agreement (also referred to as a restrictive covenant since it imposes a restriction on trade or commerce) will be governed by Florida Statute s. 542.335.  (A copy of this statute is set forth below).  Written and signed non-compete agreements or clauses are presumptively valid if they are reasonable in time (the non-compete time period), area (geographic limitation), and line of business; these clauses cannot be overbroad.

 

Even if the non-compete agreement is in writing and signed by the employee, it still needs to be supported by a proven legitimate business interest justifying its enforcement (e.g., learning of trade secrets or confidential business information, relationships with customers or clients, customer or client goodwill associated with the business). Stated differently, the employer seeking to enforce the non-compete agreement against a former employee still needs to establish that the enforcement of the non-compete is reasonably necessary to protect its legitimate business interests.

 

To enforce non-compete agreements, a party (typically, the former employer) moves for injunctive relief.

 

The case of Ankarli Boutique, Inc. v. Ortiz, 2014 WL 6674727 (4th DCA 2014) held that a two-year non-compete agreement, to the extent valid, applied from the time the former employee left the company.  The case also maintained that the non-compete period could not be “nullified because the non-compete period was devoured by the time it took to appeal an erroneous ruling on the interpretation of the [non-compete] clause.Ankarli Boutique, supra, at *1.   In other words, if there is a delay in entering a ruling (i.e., an injunction) enforcing the non-compete clause, or the non-compete time period is consumed during the pendency of an appeal, the employer or party enforcing the clause is still entitled to reap the benefit of a valid non-compete clause.  Thus, any delay tactic by litigating the issue or appealing the issue should not nullify an otherwise valid non-compete clause.

 

 Florida Statute s. 542.335

(1) Notwithstanding s. 542.18 and subsection (2), enforcement of contracts that restrict or prohibit competition during or after the term of restrictive covenants, so long as such contracts are reasonable in time, area, and line of business, is not prohibited. In any action concerning enforcement of a restrictive covenant:

(a) A court shall not enforce a restrictive covenant unless it is set forth in a writing signed by the person against whom enforcement is sought.

(b) The person seeking enforcement of a restrictive covenant shall plead and prove the existence of one or more legitimate business interests justifying the restrictive covenant. The term “legitimate business interest” includes, but is not limited to:

1. Trade secrets, as defined in s. 688.002(4).

2. Valuable confidential business or professional information that otherwise does not qualify as trade secrets.

3. Substantial relationships with specific prospective or existing customers, patients, or clients.

4. Customer, patient, or client goodwill associated with:

a. An ongoing business or professional practice, by way of trade name, trademark, service mark, or “trade dress”;

b. A specific geographic location; or

c. A specific marketing or trade area.

5. Extraordinary or specialized training.

Any restrictive covenant not supported by a legitimate business interest is unlawful and is void and unenforceable.

(c) A person seeking enforcement of a restrictive covenant also shall plead and prove that the contractually specified restraint is reasonably necessary to protect the legitimate business interest or interests justifying the restriction. If a person seeking enforcement of the restrictive covenant establishes prima facie that the restraint is reasonably necessary, the person opposing enforcement has the burden of establishing that the contractually specified restraint is overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interest or interests. If a contractually specified restraint is overbroad, overlong, or otherwise not reasonably necessary to protect the legitimate business interest or interests, a court shall modify the restraint and grant only the relief reasonably necessary to protect such interest or interests.

(d) In determining the reasonableness in time of a postterm restrictive covenant not predicated upon the protection of trade secrets, a court shall apply the following rebuttable presumptions:

1. In the case of a restrictive covenant sought to be enforced against a former employee, agent, or independent contractor, and not associated with the sale of all or a part of:

a. The assets of a business or professional practice, or

b. The shares of a corporation, or

c. A partnership interest, or

d. A limited liability company membership, or

e. An equity interest, of any other type, in a business or professional practice,

a court shall presume reasonable in time any restraint 6 months or less in duration and shall presume unreasonable in time any restraint more than 2 years in duration.

2. In the case of a restrictive covenant sought to be enforced against a former distributor, dealer, franchisee, or licensee of a trademark or service mark and not associated with the sale of all or a part of:

a. The assets of a business or professional practice, or

b. The shares of a corporation, or

c. A partnership interest, or

d. A limited liability company membership, or

e. An equity interest, of any other type, in a business or professional practice,

a court shall presume reasonable in time any restraint 1 year or less in duration and shall presume unreasonable in time any restraint more than 3 years in duration.

3. In the case of a restrictive covenant sought to be enforced against the seller of all or a part of:

a. The assets of a business or professional practice, or

b. The shares of a corporation, or

c. A partnership interest, or

d. A limited liability company membership, or

e. An equity interest, of any other type, in a business or professional practice,

a court shall presume reasonable in time any restraint 3 years or less in duration and shall presume unreasonable in time any restraint more than 7 years in duration.

(e) In determining the reasonableness in time of a postterm restrictive covenant predicated upon the protection of trade secrets, a court shall presume reasonable in time any restraint of 5 years or less and shall presume unreasonable in time any restraint of more than 10 years. All such presumptions shall be rebuttable presumptions.

(f) The court shall not refuse enforcement of a restrictive covenant on the ground that the person seeking enforcement is a third-party beneficiary of such contract or is an assignee or successor to a party to such contract, provided:

1. In the case of a third-party beneficiary, the restrictive covenant expressly identified the person as a third-party beneficiary of the contract and expressly stated that the restrictive covenant was intended for the benefit of such person.

2. In the case of an assignee or successor, the restrictive covenant expressly authorized enforcement by a party’s assignee or successor.

(g) In determining the enforceability of a restrictive covenant, a court:

1. Shall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.

2. May consider as a defense the fact that the person seeking enforcement no longer continues in business in the area or line of business that is the subject of the action to enforce the restrictive covenant only if such discontinuance of business is not the result of a violation of the restriction.

3. Shall consider all other pertinent legal and equitable defenses.

4. Shall consider the effect of enforcement upon the public health, safety, and welfare.

(h) A court shall construe a restrictive covenant in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement. A court shall not employ any rule of contract construction that requires the court to construe a restrictive covenant narrowly, against the restraint, or against the drafter of the contract.

(i) No court may refuse enforcement of an otherwise enforceable restrictive covenant on the ground that the contract violates public policy unless such public policy is articulated specifically by the court and the court finds that the specified public policy requirements substantially outweigh the need to protect the legitimate business interest or interests established by the person seeking enforcement of the restraint.

(j) A court shall enforce a restrictive covenant by any appropriate and effective remedy, including, but not limited to, temporary and permanent injunctions. The violation of an enforceable restrictive covenant creates a presumption of irreparable injury to the person seeking enforcement of a restrictive covenant. No temporary injunction shall be entered unless the person seeking enforcement of a restrictive covenant gives a proper bond, and the court shall not enforce any contractual provision waiving the requirement of an injunction bond or limiting the amount of such bond.

(k) In the absence of a contractual provision authorizing an award of attorney’s fees and costs to the prevailing party, a court may award attorney’s fees and costs to the prevailing party in any action seeking enforcement of, or challenging the enforceability of, a restrictive covenant. A court shall not enforce any contractual provision limiting the court’s authority under this section.

(2) Nothing in this section shall be construed or interpreted to legalize or make enforceable any restraint of trade or commerce otherwise illegal or unenforceable under the laws of the United States or of this state.

(3) This act shall apply prospectively, and it shall not apply in actions determining the enforceability of restrictive covenants entered into before July 1, 1996.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.