Guzzetta v. Service Corporation of Westover Hills, Del. Supr., No. 34, 2010 (Nov. 9, 2010), read opinion here.
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).
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.