Opinion
No. 76-891
Decided August 18, 1977. Rehearing denied September 22, 1977. Certiorari denied November 15, 1977.
Trial court dismissed shareholders' suit against corporate board of directors and awarded corporation damages for shareholders having obtained a temporary restraining order improperly. Shareholders appealed.
Reversed
1. INJUNCTION — Temporary Restraining Order — Improperly Obtained — Award of Damages — Prerequisite — Hearing on Merits. Before there can be an award of damages for the improper obtaining of a restraining order, there must first be a determination that no substantive grounds existed for the issuance of the order, and absent a hearing on the merits, no determination can be made that a temporary restraining order has been wrongfully issued (as opposed to a finding that it was technically deficient); accordingly, only after the enjoined party has been vindicated by successfully defending against the suit on the merits can it be held that he was wrongfully restrained, and so only at that time may there be an award of damages for the improper obtaining of the restraining order.
2. Temporary Restraining Order — Properly Dismissed — Failure to Post Bond — Remainder of Complaint — Viable — Must Be Heard. Although in stockholder's action against directors of corporation, trial court properly dismissed temporary restraining order obtained by the stockholders because of their having failed to post bond, nevertheless, no hearing on the merits of the complaint was held, and thus, if the allegations of the complaint retain vitality, those portions of the complaint other than that seeking injunctive relief remain at issue and must be heard.
Appeal from the District Court of Yuma County, Honorable Earl A. Wolvington, Judge.
Clark, Martin Pringle, Warren O. Martin, for plaintiffs-appellants.
Francis A. Benedetti, for defendants-appellees.
Plaintiffs, shareholders in Plains Cooperative Telephone Association, appeal the dismissal of their complaint against the Board of Directors of the Association and the award of damages to the Association based on the stockholders having obtained a temporary restraining order improperly. We reverse.
Alleging in their complaint a failure to comply with the provisions of corporate bylaws in calling the annual shareholders' meeting of the Association, the shareholders sought, inter alia, to enjoin the directors of the Association from holding the meeting. The court issued a temporary restraining order preventing the directors from holding the meeting. After the directors filed a motion requesting such relief, the trial court dismissed both the restraining order and the complaint because the security requirements of C.R.C.P. 65(c), had not been met. Additionally, although the Association was not a party to the action, the court awarded damages to the Association against the shareholders based upon the latter having wrongfully obtained the restraining order.
[1] The shareholders appeal, contending that damages cannot be awarded to the Association because it was not a party and asserting that before there can be an award of damages for the improper obtaining of a restraining order, there must first be a determination that no substantive grounds existed for issuance of the order. We agree.
We find no Colorado authority on this precise question; however, other jurisdictions have addressed this issue, and we find their analysis of it persuasive. C.R.C.P. 65, as relevant here, is identical to Fed.R.Civ.P. 65. Interpreting that rule, the court held in American Bible Society v. Blount, 446 F.2d 588 (3d Cir. 1971), that "no liability can arise on an injunction bond unless there is a final judgment in favor of the party enjoined." See also Janssen v. Shown, 53 F.2d 608 (9th Cir. 1931); Meeker v. Stuart, 188 F. Supp. 272 (D.D.C. 1960); Smith v. City of Whitewater, 251 Wis. 306, 29 N.W.2d 33 (1947); Sykas v. Alvarez, 126 Vt. 420, 234 A.2d 343 (1967).
[2] Absent a hearing on the merits, no determination can be made that a temporary restraining order has been wrongfully issued (as opposed to a finding that it was technically deficient). See American Bible Society v. Bount, supra, at n. 12; Rose v. Martin, 308 Ky. 661, 215 S.W.2d 579 (1948). See generally Note, Interlocutory Injunctions and The Injunction Bond, 73 Harv. L. Rev. 333 (1959). Only after the enjoined party has been vindicated by successfully defending against the suit on the merits can it be held that he was wrongfully restrained.
Notwithstanding the fact that here the injunction was dissolved for technical reasons, the defendants are entitled to be protected from the damaging effects of such an order if it is later proved that there was no substantive basis for its issuance. To hold otherwise would effectively reward those who procure an injunction without complying with the rules relative to posting bond, and would serve to encourage litigants to ignore this requirement of the rule.
Here, the shareholders' suit was dismissed and damages were awarded against them based solely upon the technical deficiency, i.e., failure to post a bond. The trial court was correct in dismissing the temporary restraining order because of failure to post a bond. However, no hearing was ever held on the merits of the complaint. Therefore, if other allegations of the complaint retain vitality, the portions of the complaint other than that seeking the emergency injunctive relief must be heard. See Allen v. City County of Denver, 142 Colo. 487, 351 P.2d 390 (1960); Ford v. Civil Service Commission, 36 Colo. App. 55, 534 P.2d 829 (1975).
The cause is remanded with directions to reinstate the complaint to allow the shareholders to present additional evidence, if any there be, in support of the allegations of the complaint. Thereafter, if it is determined that the shareholders had no substantive basis for their suit and thus no basis upon which to seek this restraining order, the court may award damages against the shareholders in favor of those presently parties to this suit or in favor of those who sustained damage and are joined as necessary parties.
JUDGE ENOCH and JUDGE SMITH concur.