Claims

The cessation of operations at Trent-Wyatt Contracting, a Jefferson City-based company that had a large erosion-control contract at the Merchants Greene development in Morristown, has created a complicated legal wrangle involving city government and Western Surety, Trent-Wyatt’s former bonding company, officials say. Trent-Wyatt obtained a bond through Western Surety that guaranteed erosion-control work, including a piping system and catch basins to convey runoff to a retention pond, would be completed. If Trent-Wyatt didn’t perform the work, Western Surety would be on the hook for construction costs. On June 5, 2019, however, Western gave a 30-day notice it was terminating its liability under the erosion-control bond, according to Morristown City Attorney Lauren Carroll. That date is important because it’s 29 days after one of Trent-Wyatt’s owners, Kevin L. Trent, filed for personal Chapter 7, or liquidation, bankruptcy. The other company owner, Gary W. Wyatt, filed for personal Chapter 7 bankruptcy on July 11. Both Trent and Wyatt estimated their liabilities range from $10 million to $50 million, according to their bankruptcy filings. Western Surety was released from the erosion-control about nine months ago. What complicates matters, Carroll says, is calculating how much work remained when Western Surety was released from the bond. Carroll and Michael Poteet, Morristown stormwater coordinator, estimate it will cost approximately $750,000, and that’s the amount Carroll is seeking to recover from Western. On Thursday, Carroll declined to identify how much Western Surety is willing to pay, but the city attorney did say it was “substantially less” than $750,000. Morristown real estate developer Shannon Greene, one of the developers of the Merchants Greene property in West Morristown, said Thursday the dispute between Morristown government and Western Surety has “nothing to do with him.” That’s partially correct, Carroll says. The city attorney says that while legal action is a possibility, she’s trying to negotiate a mutually acceptable settlement with Western to finish the erosion-control work. The Greene family owns the property, and ultimately is responsible for installing the stormwater system specified in the plans, according to the city attorney. Greene says it’s too early to install drainage pipes because the location of the stormwater system will be dictated by future tenants. It makes no sense, Greene says, to lay underground pipes that could run beneath a restaurant, hotel or other business. Similarly, spreading topsoil and seeding it with grass isn’t smart if it’s going to be removed in the foreseeable future, Greene says. However the erosion-control bond conflict is settled, Morristown city government and Greene are compelled to work together on other development-related matters in the future, Carroll says. Part of the tax-increment financing arrangement the Greene’s received when they began the development required them to put up a traffic signal at the intersection of West Andrew Johnson Highway and Howell Road. The proposed deadline is in the fall. Greene says it’s too early to install a traffic light. He says it makes more sense to spend the money when the road linking Merchants Green and Exit 4 of Interstate 81 is complete. That’s when he anticipates interest in Merchants Greene will dramatically increase. He says Merchants Greene has created approximately 800 new jobs, and he would appreciate a little flexibility from city government in trying economic times that have been disastrous for prospective buyers. “Nobody thought the economy would fall like this,” Greene said. The developer says that if he were to move immediately to order traffic signals, there’s no guarantee they would arrive by fall. He says the overwhelming majority of traffic light components are manufactured in China. https://www.citizentribune.com/news/local/surety-bond-at-issue-in-merchants-greene-contractor-s-bankruptcy/article_6984c51a-7b48-11ea-bbf0-a36e9321d2b3.html

Prior to local activist group Justice Matters filing a lawsuit last month against Douglas County’s plan to expand its jail, an attorney for the county warned that he would pursue a $3 million surety bond from the group if it went through with the lawsuit. In response, William Skepnek, an attorney representing Justice Matters, wrote a letter calling the county’s tactic one of “edict, threat and condescension.” If a court were to go along with the county’s request for a surety bond, it basically would mean that Justice Matters would have to purchase the equivalent of a $3 million insurance policy before the case could continue. Often, a surety bond also requires a business or organization to pledge its own assets if the bonding company must make a payment on the claim. In this case, the county would be seeking the bond to repay the county for costs associated with the lawsuit and to help cover any added construction costs for the jail that a lawsuit may cause. On Monday, John Bullock, the county’s attorney, disagreed with Skepnek’s characterization. He said in an email to the Journal-World that pursuing a surety bond was appropriate because Justice Matters was seeking an injunction on the county’s plans to expand the jail. If an injunction is granted, the project could be delayed and result in higher construction costs and higher interest rates on the bond market, among other increased expenses, he said. “When a party in litigation seeks an injunction, the court can require a security bond to protect the other party against losses caused by the suit,” Bullock said in an email to the Journal-World. “The county’s exercise of this statutory right is not a ‘threat,’ but a necessary measure to protect the taxpayers from significant losses expected to result from Justice Matters’ suit seeking injunctive relief.” The Journal-World reached out to the three Douglas County commissioners for comment on Bullock’s pursuit of a surety bond, but they did not immediately respond. Joanna Harader, a member of Justice Matters, recently provided the letters to the Journal-World at a reporter’s request. The three-letter correspondence between Skepnek and Bullock highlights their differing views on whether Douglas County has the legal authority to expand its jail without a new public vote. Before filing the lawsuit, Skepnek sent a letter to Bullock on Feb. 15 explaining that Justice Matters had retained him and James Kaup for legal representation and explained the group’s opposition to the expansion of the jail. He said the group had requested to send the letter and explain the reasons for its opposition in an effort to be transparent. “Among those reasons is that we believe the Douglas County Commission lacks the authority to issue the proposed bonds without first either submitting the matter to a vote, or alternatively publishing notice of its intent to issue, enabling voters to petition to place the issue on the ballot,” Skepnek wrote. In a response, dated March 5, Bullock noted the county’s previously stated rationale for the expansion without a new vote: a 1994 sales tax referendum, which created a 1-cent sales tax “for general government purposes, including the issuance of sales tax revenue and general obligation bonds, and also including … The Expansion and operations of the county jail.” Bullock said that gave the county the authority to issue bonds without voters signing off. However, if Justice Matters went through with the lawsuit, he said the county would seek the dismissal of the lawsuit on “various legal grounds.” He also said the county would pursue a surety bond from Justice Matters “to protect the taxpayers against the costs the county will suffer on account of your client’s lawsuit.” Bullock said the surety bond, which would need to be approved by the court, would be “not less than $3 million.” “We urge your clients to reconsider their plans to use litigation to advance their agenda,” Bullock said in the letter. In a second letter to the county, dated March 6, Skepnek said he was disappointed in the county’s response. He also said he and Justice Matters did not believe the court would approve such a surety bond in its challenge to the county’s legal authority to expand the jail. He, again, asked the county to consider a new public vote on the expansion of the jail. “If the citizenry of Douglas County want a jail expansion it will surely be authorized by the voters in a public contest,” Skepnek said. Justice Matters filed its lawsuit in Douglas County District Court on March 16, making the same argument that Douglas County commissioners are not allowing residents to vote or petition against the plan to fund an expansion of jail, despite the group’s belief that they have an obligation to do so under state law. Karrey Britt, a spokeswoman for the county, said the county planned to file a response to the lawsuit on Tuesday. The lawsuit is a culmination of a yearslong effort by the group and others to stop the county from expanding the jail to house more inmates. As the Journal-World has reported, county leaders say that the jail is overcrowded, making it unsafe for both staff and inmates; opponents argue that the county needs to try more alternatives to incarceration to lower the jail’s population. Two local nonprofit organizations, Justice Matters and the Lawrence Sunset Alliance, along with five individuals who reside within the county, are petitioning for an injunction to stop the county from issuing bonds to fund the planned expansion, estimated to cost roughly $29.6 million, plus a separate estimated $1.5 million renovation of the jail’s central heating and cooling plant. The county had approximately $9 million on hand to go toward the jail, the Journal-World has reported. County staff planned to pursue a bond issue with a 20-year debt service to finance the rest of the estimated $31.1 million total, which is about $22.1 million. https://www2.ljworld.com/news/county-government/2020/apr/06/douglas-county-warned-activist-group-of-3-million-surety-bond-if-it-filed-lawsuit-challenging-jail-expansion/

COLUMBUS, Ohio, April 2, 2020 /PRNewswire/ — The COVID-19 pandemic and the historic federal, state, and local government efforts to mitigate its spread has stopped the economy in its tracks. Social distancing and self-isolation may result in the US unemployment rate reaching record levels. The dialogue on business interruption insurance will continue, whether in the courts or to discuss a federal backstop. At the forefront of the issue of the ability of businesses to perform under stress is surety insurance. The insurer, as surety, is the party that guarantees the performance of another party, often a contractor or a construction project. The contract through which the guarantee is executed is a surety bond. As of December 31, 2019, there were 323 insurers that reported direct premium written for the surety insurance line of business. There are various types of surety insurance; however, the insurers that wrote performance bonds may see a rise in claim frequency and severity as a result of unemployment, constrained cash flows, and other phenomena impacting businesses. Direct premium written (DPW) for surety insurance for the 323 insurers was nearly $6.8 billion at year-end 2019. The top 20 writers, based on all types of surety insurance written, accounted for over $4.4 billion, 65 percent of the industry dollar volume. Surety insurance comprised approximately 17 percent of these top 20 insurers’ books of business and was but 3 percent of the books of business of all carriers writing some surety. Despite the diversification within many of the top 20, surety insurance constituted more than 90 percent of seven insurers’ total 2019 DPW. According to Joseph L. Petrelli, President and co-founder, Demotech, the first company to review and rate independent regional and specialty insurers, “By count, the 323 carriers writing surety insurance are nearly 13% of the Property and Casualty insurers reporting to the National Association of Insurance Commissioners. With respect to the impact of COVID-19 on surety insurers writing performance bonds, keep in mind that at the time the performance bonds were written, the economy was humming, competent contractors were likely to be at full capacity, with projects in their pipeline. COVID-19 and the response to mitigate the contagion changed everyone’s world. It is unlikely that insurers writing surety insurance will be spared from future discomfort.” A full article along with a chart of the top 20 writers of Surety Insurance by 2019 DPW can be found here. https://www.prnewswire.com/news-releases/demotech-investigates-impact-of-covid-19-on-surety-insurance-301034239.html

In response to the abrupt closing of the Lisbon Valley Copper Mine, Director John Baza of the Utah Division of Oil, Gas and Mining has signed an emergency order, according to a statement from the division. The order requires that the operator contains and/or reclaims any and all facilities at the mine to the extent necessary to immediately prevent any imminent threat of environmental harm. If the operator fails to take immediate action to ensure the environmental harms are mitigated, the division will undertake emergency actions to forfeit the full amount of the surety bond. A surety bond ensures monies are available to the division for reclamation in the event the company defaults on its permit. The emergency order will apply until the next Board of Oil, Gas and Mining Board Hearing scheduled for April 22. An inspector from the Bureau of Land Management inspected the site early Friday. A division inspector is now onsite. “Our main objective is to ensure the facility poses no threat to the surrounding environment and that there are no risks to public safety,” said a statement from the division. According to the operator’s annual report, the mine is 984 acres in size and includes four pits, one leach pad, approximately four water process ponds, and several buildings. On Monday, March 23, inspectors from the Division of Oil, Gas and Mining confirmed for the operator steps that will need to be taken to avoid potential off-site impacts. Any work that’s done can only be shutdown or reclamation related; no production work can occur. The surety that holds the bond for Lisbon Valley Mining Company has been contacted while a contractor develops a shutdown plan for the mine. The surety bond ensures money if available for reclamation work in the event a company defaults on its payment, according to the Division. The contractor, like the furloughed employees, is not being paid and has warned state officials “it will be hard to keep up their environmental protection measures if they can’t pay for supplies, fuel and wages,” but they will continue to work. The Division said it could fund the contractor as a stopgap measure and seek reimbursement later.

A captive insurance company (usually just referred to as a “captive” in short) is an insurance company that is set up to provide for the insurance needs of its owners, and them only. There are many types of captives, and they can be organized in many ways, most typically as corporations but also as LLCs and some other more exotic types of entities. A captive can be organized — and many are — as a Series LLC. That particular form of LLC is very complex, and consists of a larger LLC (called the “series organization”) which is then subdivided into many smaller units (called “protected series”). Very similar in many respects to a parent/subsidiaries structure, Series LLCs offer certain benefits in the captive insurance field when it comes to insurance licensing and capital requirements. In 2016, the National WW II Museum (New Orleans) ordered a steel truss canopy from Gava Steel, Inc., and paid about $3 million. To protect itself, the Museum obtained a bond in the same amount from Talisman Casualty Insurance Company, LLC, which is purportedly managed (which is different than owned) by Jeffrey Schaff of Louisiana. For whatever reason, Gava Steel didn’t perform as promised, and the Museum made a claim on Talisman’s bond. Claiming that no valid bond was ever issued, Talisman didn’t honor the bond. So, Museum sued Talisman in the Civil District Court of the Parish of Orleans. Talisman then removed the case to the U.S. District Court for the Eastern District of Louisiana. claiming diversity jurisdiction since Talisman was organized in Nevada and the Museum is in Louisiana. As an aside, federal law requires what is known as “complete diversity” of citizenship in order for diversity jurisdiction to apply, i.e., no plaintiff can be from the same state as any defendant. Where a party is an LLC, the court looks through the LLC to see where its members are located. Museum then filed a motion to remand the case back to the Parish of Orleans court, arguing that because Talisman was an LLC, and because its (undefined) owner is a resident of Louisiana, both the plaintiff and the defendant were located in Louisiana and so there was no complete diversity such as would support diversity jurisdiction in the federal court. Talisman made two arguments why complete diversity was present. The first argument was that because Talisman was a licensed captive insurance company, it should be treated as a corporation with its location in Nevada, instead of as an LLC where the jurisdiction of its owner (Schaff) would place it in Louisiana. Second, and most interestingly, Talisman argued that it was a Series LLC, that only protected cell #01 was potentially liable on the bond, and that cell #01 didn’t have any members at all, much less any members in Louisiana — other of Talisman’s protected cells might have Louisiana members, but not protected cell #01. To support this second argument, Talisman submitted an affidavit which said that protected cell #01 had no members. All this resulted in the opinion of the U.S. District Court that I shall next relate. The court took these arguments in reverse. As to Talisman’s argument that protected cell #01 had no members, that argument immediately backfired. The court pointed out that under long-standing law, if an LLC has no members, then it is “stateless”, and a stateless LLC cannot establish diversity of jurisdiction. Since Talisman had submitted an affidavit that protected cell #01 had no members, it had effectively shot itself in the foot on this issue. Talisman’s other argument, that even though it was organized as an LLC, Talisman should be treated as a corporation because it was a licensed captive insurance company, also fell on deaf ears. The court noted that 175 years ago, the U.S. Supreme Court allowed corporations to be treated as citizens for purposes of diversity citizenship, but since then the Supreme Court has consistently restricted business entities’ access to the federal courts by way of diversity jurisdictions, to which Talisman’s argument for an expansion of such jurisdiction clearly ran counter. Moreover, in footnote 2, the court pointed out that the Museum had sued Talisman generally, and not just protected cell #01, and Talisman did in fact have its only member in Louisiana such that complete diversity was destroyed. ANALYSIS What this case highlights is that there are many nuances about Series LLCs that are yet to be discovered. While it may be possible to structure things with a Series LLC that could not be so structured with any other form of business entity, all the ramifications of doing that are probably impossible to predict. Here, for whatever reason, protected series #01 was structured in a way that it did not have any “members” in the sense that an ordinary LLC typically would, but that ended up having a negative repercussion as it defeated Talisman’s attempt to move the case out of Louisiana state court and into the federal courts. Yes, Series LLCs are extremely versatile: They are also dangerous. As I have pointed out on numerous occasions, if an ordinary LLC is a Cessna 172 with few systems and controls, a Series LLC is a 747 with hundreds of systems and controls thus making it very easy for a fatal mistake to be made. Or, as my friend and colleague Tom Rutledge is so fond of pointing out, for most folks the creation of a Series LLC is like giving an Uzi to a three-year old. On a more practical note, Talisman’s argument that protected series #01 did not have any members is probably technically incorrect, for the reason that in the absence of members the series organization itself is the member, in this case being Talisman the main company. Thus, the court could probably have correctly held that protected series #01’s member was Talisman, and Talisman’s member was Schaff, and so therefore protected series #01 was located in Louisiana for purposes of testing diversity jurisdiction. An alternative construct would be that without members, protected series #01