Nonprofits not exempt from injunction bonds

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A May 27 opinion from the Seventh Circuit suggests that the court may be taking a harder line on the mandate that parties seeking preliminary injunctions post a bond to cover damages that may result from the injunction.

The court acknowledged that, in many cases, courts have upheld district courts’ waivers of the requirement. But the court called the practice a “seeming contradiction” of Rule 65(c).

The case involved a lawsuit by a nonprofit enterprise called the Habitat Education Center and other parties against the U.S. Forest Service to prevent the logging of several thousand acres in a Wisconsin national forest.

U.S. Magistrate Judge Aaron E. Goodstein granted a preliminary injunction to bar the forest service from issuing a permit to the high bidder for the logging contract.

However, the court also required Habitat to post a $10,000 bond pursuant to Rule 65(c), which provides, “the court may issue a preliminary injunction or a temporary restraining order only if the movant gives security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained.”

Habitat asked for reconsideration on the grounds that a nonprofit enterprise should not have to post an injunction bond, but the district court denied the motion.

Ultimately, the district court dissolved the preliminary injunction, and granted summary judgment in favor of the forest service.

Habitat then appealed the order to post the injunction bond, as it now faces the possibility of damages, up to the $10,000 limit.

In an opinion by Judge Richard Posner, the Seventh Circuit affirmed.

Posner wrote, “We are not persuaded by Habitat’s argument that nonprofit entities, at least those devoted to public goods of great social value, such as the protection of the environment, should be exempted from having to post injunction bonds.”

The court concluded that such a rule would flatly contradict Rule 65(c).

The court acknowledged that, in two types of cases, appellate courts have allowed district courts to waive the requirement: when there is no danger the opposing party will incur any damages from the injunction; and when the party seeking the injunction lacks the ability to pay the bond.

But even assuming that those types of cases do not conflict with Rule 65(c), the court concluded that Habitat’s case did not fit into either category.

First, the court found that the forest service is bound to lose some money as a result of the injunction. Second, the plaintiffs had the ability to pay the bond. The court noted that one of Habitat’s co-plaintiffs, Environmental Law & Policy Center, has annual revenues of $7 million.

The court then turned to whether the $10,000 bond was excessive relative to the forest service’s likely damages.

The court found that, as a result of the injunction, the forest service was unable to sell its timber for a year. Because of the effect of the time value of money, the court found there will always be a risk of damages from a delay of this sort.

Posner wrote, “Businesses, individuals, and doubtless even federal agencies … value having cash now rather than a promise, however reliable, of cash later.”

In addition, the value of timber could have dropped during the period of the injunction. The court found that the value of timber has actually increased since the injunction was granted, but that this does not nullify the risk, at the time the injunction is granted, that it would go down.

Furthermore, the rebidding process that the forest service must engage in has costs, estimated by the service at $2,350.

Finding that the amount of the bond was proper, the court returned to Habitat’s argument that nonprofits should be exempt from posting injunction bonds.

Posner remarked, “Nonprofit entities such as Habitat have the benefit of exemption from federal income tax, and often from local property taxes, as well as the indirect tax subsidy provided to nonprofits by the charitable deduction from personal income tax. Need the courts grant them an exemption from Rule 65(c) as well?”

Finally, Posner rejected Habitat’s argument that it should have only had to post a nominal bond of $1, penning a lengthy indictment of nominal damages in general. Posner suggested they are merely a “fossil remnant of an earlier legal system,” that can be justified only by “talk[ing] in a circle.”

Posner suggested that when a breach occurs, but no damages result, “the court could just say: the plaintiff proved a violation of his rights, but the violation caused no monetizable injury.”

Case analysis

The court’s expansive holding could provide a basis for arguing that an injunction bond is always required.

One of the exceptions to posting bond that courts have recognized is when there is no danger the opposing party will incur any damages from the injunction. However, the court’s discussion of the time value of money could be read as meaning that will never actually be the case. The right to do something today will always have some value greater than the right to do it only at a later date.

The other exception is when the movant lacks ability to pay. However, as the opinion notes, nothing in the Rule permits such an exception.

On the contrary, a finding that a party is unable to post a bond sufficient to cover likely damages is an implicit finding that damages may be incurred by the nonmoving party, and therefore, the movant must post security.