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.

Service Corporation of Westover Hills v. Guzzetta, C.A. No. 2922-VCP (Del. Ch. July 21, 2011), read opinion here. The Delaware Supreme Court’s remand decision in this case last year was highlighted on this blog here. The importance of this case is not dependent on most of the pedestrian facts involved, so the reader is directed to the Supreme Court’s decision for that background.

Why This Case is Important: There are precious few Delaware decisions that amplify the basis for determining the amount of a bond that is required for the issuance of injunctive relief pursuant to Court of Chancery Rule 65(c), notwithstanding the frequency with which injunctive relief is granted in Delaware’s Court of Chancery. This is one of those few amplifications. Before this decision, the Delaware Supreme Court opinion that remanded this matter, (linked above), was the first definitive Delaware ruling on the topic. Many of the citations in the Supreme Court’s opinion were to other jurisdictions. Due to the rarity of the extended Delaware case law on this essential topic for any lawyer seeking a TRO or a preliminary injunction, this decision belongs in the “tool box” of any litigator who practices business litigation in Delaware.

Procedural Context

Some procedural context is helpful to understand this decision after remand from the Supreme Court. After a TRO was granted in this case in May 2007, the defendants, who were the parties enjoined, moved for a bond to be imposed pursuant to Rule 65(c), which was granted shortly afterwards in the amount of $5,000. About a month later, in June 2007, after a hearing, a preliminary injunction was ordered. More than a year later, in September 2008, before a trial, the defendants moved to have the amount of the initial bond increased. The amount of the bond was increased in October 2008 to $10,000. In December 2009, the Court of Chancery issued an opinion, concurring with the Master in Chancery’s Final Report and finding that the plaintiff was not entitled to a permanent injunction. Thereafter judgment was awarded to the defendants in the amount of $10,000 (the amount of the increased bond), for having been wrongfully enjoined. The defendants appealed that part of the Chancery decision that limited the damage award to $10,000. On remand, Delaware’s High Court directed the Court of Chancery to explain why the bond was raised from $5,000 to $10,000 and not higher.

Key Legal Principles Promulgated

Court of Chancery Rule 65(c) provides that: “No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the Court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.” The Court noted in footnote 35 that this language is “virtually identical to that in Fed. R. Civ. P. 65(c).”

Two criteria that the Court must consider when estimating the appropriate amount of security to protect the enjoined party are: (1) the purpose of the security is to protect a wrongfully enjoined party from injunction-related damages; and (2) the need for estimated damages to be credible. Other factors that the Court must consider include: (i) the guidance that “‘courts should err on the high side’ by setting a bond at a level likely to meet or exceed a reasonable estimate of potential damages; and (ii) an enjoined party may only recover damages up to the amount of the injunction bond.”

Moreover, the Court observed that the security is only intended to cover “those costs and damages directly sustained as the result of an improvident issuance of the restraining order or preliminary injunction.”

The Delaware Supreme Court’s referenced opinion remanding this case acknowledged that the trial court may need to conduct an evidentiary hearing on estimated damages in connection with determining the appropriate amount of the bond  so that the trial court would be in a position to “explain its rationale for setting a bond ….” In this case, the Supreme Court commented that an explanation would have been helpful to explain why the amount of the bond was set below the “… enjoined party’s credible estimate of potential damages.”

The Chancery decision issued today addressed the different interpretation that the parties advanced regarding exactly what the Supreme Court meant in its remand ruling. The Court of Chancery instructed that one party was: “conflat[ing] the setting of an injunction bond with the determination of damages.” Moreover, the courts are loathe to retroactively increase the amount of injunction bonds. See footnote 40.

Another important principle on this topic that the Court of Chancery explained is the following: “Because enjoined parties may recover only against the bond itself, it serves ‘generally to limit the applicant’s liability and inform the applicant of the price of a wrongful injunction.'”

Bottom line

The Court of Chancery in this decision increased the amount of the injunction bond to over $26,000 and directed the parties to promptly contact the Court to schedule an evidentiary hearing if they were not able to agree on the amount of damages. If such a hearing were scheduled, the enjoined party would be permitted to “proffer evidence of any legally cognizable damages they actually suffered as a result of being enjoined, but the maximum amount they may recover is the amount of the bond.” See generally footnotes 57 and 58 (citing Emerald Partners v. Berlin, 1998 WL 474195 (Del. Ch. Aug. 3, 1998)). As I mentioned in the preface, the principles addressed in this case have wide application that far exceed the facts (or meager amounts) involved in this decision.