Summer 2004-05 Judicial bond limited to original remedy sought

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Number 56
Summer 2004

Judicial bond limited to original remedy sought

An amendment to a complaint and to the provisional remedy sought does not extend the coverage of a judicial bond originally posted, unless the bonding company consents. United Surety & Indemnity Company v. Bayamón Steel Processors, Inc., 2004 TSPR 56.

The attachment bond

Bayamón Steel filed a collection of money suit against Barrio Obrero Steel Yard, Inc., and requested the judge to order the attachment of defendant assets to secure the judgment that could be entered in its favor. As required by law, Bayamón Steel posted a bond to insure Barrio Obrero against damages in the event that the attachment turned out to be unlawful. The bond was issued by United Surety.

Apparently because Bayamón Steel was unable to identify sufficient assets of Barrio Obrero to cover the debt, it amended the complaint to include Barrio Obrero's principals and to insert a new cause of action based on fraud against creditors. At the plaintiff's request, the judge entered an order prohibiting Barrio Obrero and its principals from transferring any assets, and ordering the delivery of certain resources that had been allegedly hidden. This new order was not preceded by a hearing, additional bonding nor notice to United Surety.

Counterclaim

Barrio Obrero filed for protection under Chapter 7 of the Bankruptcy Code, but its principals instead filed a countersuit against Bayamón Steel, claiming damages resulting from the second court order.

The judge ruled in favor of the counter-claiming principals and ordered Bayamón Steel to compensate them in determined amounts. The judge also ordered United Surety to honor the bond therefor.

United Surety filed a separate suit contesting the validity of the judgment against it in the first case, claiming that Bayamón Steel's filing of the amendment to the original complaint had the effect of relieving the bond, as United Surety had not consented thereto.

United Surety's case

The trial court ruled against United Surety. The amended, it said, constituted a modification that had no effect on the bond. Moreover, it found that the bond secured not only the original attachment order, but the subsequent prohibition to transfer assets as well.

The Court of Appeals qualified the trial court's judgment, explaining that due to the lack of notice to and consent of United Surety, the bond did not extend to compensation for damages that resulted from the second order, but was limited to the original attachment.

The Puerto Rico Supreme Court agreed with the Court of Appeals. The issuer of a bond, it said, cannot be liable for obligations that it never assumed. Bayamón Steel's original complaint was a traditional collection suit against a debtor company: a fairly simple claim to prove based on record documents. The amendment, however, presented a much tougher case-a risk that United Surety never had the opportunity to consider.


© 2004 Goldman Antonetti