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Virginia Plastics Co. v. Biostim

argued: May 14, 1987.

VIRGINIA PLASTICS CO., T/A PLASTICS PRODUCTS CO., A VIRGINIA CORPORATION
v.
BIOSTIM INC., A DELAWARE CORPORATION FIDELITY AND DEPOSIT COMPANY OF MARYLAND, APPELLANT



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY, D.C. Misc. No. 85-0023.

Author: Gibbons

Before: GIBBONS, Chief Judge, MANSMANN, Circuit Judge and McCUNE, District Judge*fn*

Opinion OF THE COURT

GIBBONS, Chief Judge:

Fidelity and Deposit Company of Maryland (Fidelity), the surety on an injunction bond, appeals from an order of the district court directing it to pay the face amount of that bond to the obligee, Virginia Plastics Company (Virginia Plastics). Fidelity contends that the evidence considered by the district court did not establish a sufficient nexus between the injunction in question and the damages suffered by Virginia Plastics to support this order. Because we conclude that the evidence considered by the court was insufficient to support the order, we will vacate it and remand for an evidentiary hearing.

I.

In December of 1984, the United States District Court for the Western District of Virginia entered a $94,370.12 default judgment in favor of Virginia Plastics and against Biostim, Incorporated (Biostim). Because Biostim's principal place of business at that time was in New Jersey, Virginia Plastics registered this judgment with the United States District Court for the District of New Jersey on January 16, 1985. One week later, Biostim moved in the New Jersey district court to have the Virginia district court's judgment vacated on the ground that the Virginia district court lacked personal jurisdiction over Biostim. The New Jersey district court enjoined Virginia Plastics from executing on the judgment pending resolution of this jurisdictional challenge, but required an injunction bond for costs and damages. See Fed. R. Civ. P. 65(c).

Pursuant to an order dated January 23, 1985, Biostim filed a cash deposit of $5,000.00 with the court as a security for the injunction bond. In August of 1985, following a request by Virginia Plastics to increase the amount of the security, the New Jersey district court ordered Biostim to file a $50,000.00 surety bond. Biostim then approached Fidelity with a request for an injunction bond in this amount, and Fidelity agreed to assume the obligation as a surety. By this undertaking, Fidelity bound itself as follows:

NOW, THEREFORE, the condition of this obligation is such that, if the said Defendant shall pay the said Plaintiff such damages as they may sustain by reason of the said preliminary restraining order or temporary injunction if the court finally decides that the said Defendant is not entitled thereto (or to either or any of them, if more than one defendant), then this obligation shall be void; otherwise to remain in full force and effect.

On February 11, 1986, the New Jersey district court determined that the Virginia district court did have personal jurisdiction over Biostim and that the Virginia judgment against Biostim was valid and enforceable. Shortly thereafter, a United States magistrate filed a post-judgment discovery order for the purpose of locating and identifying Biostim's assets. Service of this order was attempted by express mail but was returned marked "Moved to Florida as of 12/16/85 . . . Return to Shipper." Virginia Plastics then obtained a second order for post-judgment discovery which was sent to Biostim's new Florida address. However, by letter dated April 28, 1986, counsel for Biostim informed Virginia Plastics that no representative or officer of Biostim would appear on the company's behalf, that Biostim was seriously considering filing for bankruptcy, and that Biostim had retained bankruptcy counsel. Eventually, Biostim did filed for bankruptcy in the United States Bankruptcy Court for the Middle District of Florida.

Upon receiving word that Biostim would not comply with the post-judgment discovery order, Virginia Plastics filed a motion in the New Jersey district court seeking to enforce Fidelity's liability on the injunction bond that had been issued. Accordingly, the district court endeavored to determine whether its injunction alone rendered Virginia Plastics' judgment uncollectible since, in this particular instance, only such a finding would justify holding Fidelity liable on its obligation as surety.*fn1

II.

The New Jersey district court was not presented with exhaustive evidence regarding the potential link between the issuance of its injunction and Virginia Plastics' inability to execute on the judgment against Biostim. In fact, the only papers submitted in evidentiary form in connection with Virginia Plastics' motion to enforce liability on the bond were the briefs of both parties and the affidavit of an attorney for Virginia Plastics. In this affidavit, the Virginia Plastics attorney pointed out that Virginia Plastics had twice attempted to depose Biostim representatives for the purpose of locating and identifying Biostim's assets, that Biostim did not comply with two orders issued to compel post-judgment discovery, and that Biostim was contemplating filing a bankruptcy petition. Beyond this, the affidavit, along with the party brief, afforded the district court no pertinent information.

Apparently, in deciding to enforce liability on the security bond, the district court also considered papers from the record in Virginia Plastics' prior effort to enforce the Virginia judgment -- a proceeding in which Fidelity was not a party. These additional papers included the opinions of various people regarding Biostim's ability to satisfy Virginia Plastics' judgment and Biostim's relative financial strength at different points during the enforcement proceeding. Among these papers were the affidavit of Charles Lemon, president of a Virginia Plastics subsidiary; the affidavit and subsequent certification of Lloyd A. Ferreira, president of a Virginia Plastics subsidiary; the affidavit and ...


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