author: ROBERTS, J., for the Court.

text:
    CENTRAL HEALTHCARE SERVICES, P.A. and Wendall Harrell, Appellants/Cross-Appellees v. CITIZENS BANK OF PHILADELPHIA, Mississippi, Appellee/Cross-Appellant.
    No. 2007-CA-00612-COA.
    Court of Appeals of Mississippi.
    June 30, 2009.

      J. Edward Rainer, Brandon, Lora Suzanne Gipson, attorneys for appellants.
    James W. Craig, Stratton Bull, Jackson, Benjamin Lyle Robinson, attorneys for ap-pellee.
    Before MYERS, P.J., IRVING and ROBERTS, JJ.
   ROBERTS, J., for the Court.

¶ 1. This appeal centers on a discrepancy between language in a granting clause and what was termed as the “acquisition clause” of a quitclaim deed. The events that led to the necessity for and transfer of that quitclaim deed will be described in greater detail below. In any event, Central Healthcare Services, P.A. (CHS) executed a quitclaim deed, and pursuant to the granting clause of that quitclaim deed, CHS gave Wendall Harrell all of its interest in two portions of property. However, the acquisition clause of the quitclaim deed did not mention one of the two portions of property. As will be discussed, Citizens Bank of Philadelphia, Mississippi (the Bank) had an interest in both portions of property, and it filed suit to confirm its ownership of the portion that was not mentioned in the acquisition clause. CHS and Harrell denied that it transferred its ownership in the property at issue. Additionally, CHS and Harrell filed four counterclaims against the Bank.

¶ 2. After trial, the Leake County Chancery Court held that the language in the granting clause controlled over the language in the acquisition clause. Consequently, the chancellor held that the Bank owned both tracts mentioned in the granting clause. However, the chancellor declined to order CHS or Harrell to pay a deficiency amount, indemnification, or attorneys’ fees. The chancellor also denied all of CHS’s and Harrell’s counterclaims.

¶ 3. CHS and Harrell appeal. They claim that the chancellor erred when she found that the quitclaim deed transferred the property at issue. CHS and Harrell also argue that the chancellor erred when she denied their counterclaims. Finding no error, we affirm on direct appeal. The Bank cross-appeals and argues that the chancellor erred when she declined to award a judgment for the deficiency amount, indemnification, or attorneys’ fees. After careful consideration, for reasons that will be expressed in greater detail below, we find that the chancellor erred when she denied the Bank’s request for attorneys’ fees and the Bank’s request for indemnification. Accordingly, we reverse and remand on cross-appeal.

FACTS AND PROCEDURAL HISTORY

¶4. For some time prior to September 2000, Harrell had been acquiring piecemeal sections of property situated at the intersection of Highway 16 and Highway 35 in Leake County, Mississippi. Harrell’s goal was to compile those sections into a larger property and then develop a commercial shopping center on that property. The Bank had financed Harrell’s previous acquisitions.

¶ 5. In September 2000, the Bank loaned Harrell approximately $950,000. That figure represented the consolidation of Harrell’s previous loans. Harrell gave the Bank a deed of trust as collateral for the September 2000 loan. Sections of property described as “the Crawford lot” and “the Hardage lot” were included in the description of the property collateralized by that deed of trust. Both the Crawford lot and the Hardage lot — then owned by CHS — were encumbered by debts prior to the September 2000 loan. Those outstanding debts were later satisfied by the proceeds of the September 2000 loan.

¶ 6. Harrell later defaulted on the September 2000 loan, and after extending Harrell’s loan payments, the Bank eventually foreclosed on the September 2000 deed of trust. The Bank was the successful bidder at the foreclosure sale. The Bank then sold the property to an entity called “the Whitten Group.” However, the Whitten Group determined that Harrell did not own the title to the Crawford lot when he provided the Bank with the deed of trust.

¶ 7. Harrell’s attorney, Roy Wright, approached Gregory, the principal owner of CHS, regarding whether she would execute a quitclaim deed transferring CHS’s interest in the Crawford lot to the Whitten Group. Gregory agreed. Wright drafted the quitclaim deed and CHS executed it. However, there was a discrepancy in the quitclaim deed. The language in the granting clause contained descriptions of the Crawford lot and the Hardage lot. However, the drafting attorney included language that he termed as an “acquisition clause.” The acquisition clause only described the Hardage lot. When confronted with the discrepancy, CHS refused to execute a deed to correct it. Instead, CHS claimed it never intended to convey the Crawford lot to the Whitten Group and that it never conveyed the Crawford lot to Harrell. Additionally, Harrell claimed he never had title to the Crawford lot.

¶8. In October 2004, the Bank filed a complaint to confirm its ownership of the Crawford lot and to remove the cloud on the title to that property. The Bank initially named CHS as the sole defendant, but it later amended its complaint and added Harrell as a defendant. CHS and Harrell filed counterclaims against the Bank for abuse of process, malicious prosecution, defamation, and for damages as set forth by the Litigation Accountability Act of 1988. Miss.Code Ann. §§ 11 — 55— 1, -15 (Rev.2002). CHS and Harrell also requested $3,000,000 in punitive damages.

¶ 9. The parties went to trial over the course of two days in April 2006 and one day during October 2006. In March 2007, the chancellor rendered her opinion and final judgment. The chancellor found that the Whitten Group owned the title to the Crawford lot. However, the chancellor declined to order CHS or Harrell to pay the Bank damages for the deficiency amount, indemnification, or attorneys’ fees. Additionally, the chancellor dismissed CHS’s and Harrell’s counterclaims and their request for attorneys’ fees.

¶ 10. CHS and Harrell appeal. They claim the chancellor erred when she: (1) found that the quitclaim deed conveyed CHS’s interest in the Crawford lot, (2) dismissed their counterclaims, and (3) declined to award them attorneys’ fees. The Bank cross-appeals and claims the chancellor erred when she: (1) declined to award it attorneys’ fees, (2) declined to award it a judgment for the deficiency amount, and (3) declined to award it a judgment to indemnify the Bank for the money it had paid the Whitten Group to repurchase the Crawford lot.

STANDARD OF REVIEW

¶ 11. “This Court follows a limited standard of review when addressing appeals from a chancery court.” Kennedy v. Anderson, 881 So.2d 340, 345(¶ 16) (Miss.Ct.App.2004). “We shall not disturb the findings of a chancellor unless the chancellor was manifestly wrong, clearly erroneous, or there was an application by the chancellor of an erroneous legal standard.” Id. “Questions concerning construction of contracts are questions of law.” McMurphy v. Three Rivers Planning & Dev. Dist., Inc., 966 So.2d 192, 195(¶ 12) (Miss.Ct.App.2007). “We review questions of law pursuant to a de novo standard.” Id.

ANALYSIS OF ISSUES ON DIRECT APPEAL

I. OWNERSHIP OF THE TITLE TO THE CRAWFORD LOT

¶ 12. In this issue, CHS and Harrell claim the chancellor erred when she concluded that the quitclaim deed included CHS’s interest in the Crawford lot. According to CHS and Harrell, the chancellor should have awarded CHS title to the Crawford lot. We disagree.

¶ 13. This issue requires that we resolve a dispute in the construction of a quitclaim deed. Our purpose under the circumstances is to “ascertain and effectuate the parties’ intent.” Pursue Energy Corp. v. Perkins, 558 So.2d 349, 351 (Miss.1990). To do so, we will first examine the language contained within the “four corners” of the quitclaim deed. Id. at 352. If the quitclaim deed is clear or unambiguous, our analysis ends. Id.

¶ 14. We cannot find that the quitclaim deed is clear or unambiguous. Surveyor James Townsend testified at trial. Townsend surveyed the property at issue after the Bank purchased it at the foreclosure sale and then sold it to the Whitten Group. According to Townsend, the Crawford lot fell under the legal description in the granting clause of the 2004 quitclaim deed. However, Wright’s “acquisition clause” only mentioned the Hardage lot. Under the circumstances, we are directed to proceed to the next tier of the three-tiered process regarding resolution of such disputes. This next tier involves “implementation of applicable ‘canons’ of contract construction.” Id.

¶ 15. “[I]f the wording of the deed is ambiguous, the practical construction placed thereon by the parties will have much weight in determining the meaning.” Thornhill v. System Fuels, Inc., 523 So.2d 983, 990 (Miss.1988). “[Consideration of the totality of the circumstances attendant the devising of an instrument may help reveal the parties’ intent.” Pursue Energy, 558 So.2d at 353. The circumstances and behavior of the parties in the case at bar after the original transactions clearly show that CHS — through Gregory- — intended for the quitclaim deed to transfer CHS’s interest in the Crawford lot.

¶ 16. Gregory originally acquired the Crawford lot from her father, Harrell. Gregory had an outstanding loan with the Bank. The Crawford lot was collateral for that loan. From 1995 through 1999, Gregory’s company, CHS, provided the Bank with financial reports. Those financial reports consistently listed the Crawford lot as an asset.

¶ 17. The Bank loaned Harrell $950,000 in September 2000. Harrell paid off CHS’s debt on the Crawford lot. Prior to that payment, Harrell had never paid any portion of CHS’s debt on the Crawford lot. Gregory did not list the Crawford lot as an asset in CHS’s 2000 financial report to the Bank. Gregory never again listed the Crawford lot as an asset.

¶ 18. Additionally, CHS did business out of a building situated on the Crawford lot. After September 2000, CHS vacated that building. Harrell subsequently demolished that building, re-graded the site, and made it indistinguishable from the rest of Harrell’s development property.

¶ 19. When the Bank initiated foreclosure proceedings in 2004, Harrell transferred all of the development property, including the Crawford lot, to a business entity called “Cotton Place Corporation.” Harrell’s attempt to transfer the Crawford lot suggests that Harrell believed he owned the Crawford lot. Additionally, the quitclaim deed was prepared solely to resolve the question regarding ownership of the Crawford lot, as ownership of the Hardage lot was not in question. Wright was the attorney who prepared the quitclaim deed. He testified that the purpose of the 2004 quitclaim deed was to clear up the title on the Crawford lot so the title could be transferred to the Whitten Group. Based on the totality of the circumstances, we must conclude that the parties executed the quitclaim deed to reflect Harrell’s ownership of the Crawford lot. Accordingly, we cannot find that the chancellor erred when she resolved this issue in the Bank’s favor. This issue is without merit.

II. COUNTERCLAIMS BY HARRELL AND CHS

A. ABUSE OF PROCESS

¶ 20. CHS and Harrell claim the chancellor erred when she declined to find the Bank liable for abuse of process. According to CHS and Harrell, the Bank filed its complaint solely and unjustifiably to force CHS to convey the Crawford lot. CHS and Harrell reason that the Bank is, therefore, liable for abuse of process. We disagree.

¶ 21. A cause of action for abuse of process has been described as follows:

[It] consists in the misuse or misapplication of a legal process to accomplish some purpose not warranted or commanded by the writ. It is the malicious perversion of a regularly issued civil or criminal process, for a purpose and to obtain a result not lawfully warranted or properly attainable thereby, and for which perversion an action will lie to recover the pecuniary loss sustained....

Williamson v. Keith, 786 So.2d 390, 393-94(¶ 12) (Miss.2001) (quoting State ex rel. Foster v. Turner, 319 So.2d 233, 236 (Miss.1975)). “The elements of abuse of process are: (1) the party made an illegal use of the process, a use neither warranted nor authorized by the process, (2) the party had an ulterior motive, and (3) damage resulted from the perverted use of process.” Franklin Collection Serv., Inc. v. Stewart, 863 So.2d 925, 931(¶ 18) (Miss.2003) (quoting McLain v. West Side Bone and Joint Ctr., 656 So.2d 119, 123 (Miss.1995)). According to the Mississippi Supreme Court, the “crucial element” of this cause of action is “the intent to abuse the privileges of the legal system.” Ayles v. Allen, 907 So.2d 300, 303(¶ 10) (Miss.2005) (citing McLain, 656 So.2d at 123).

¶ 22. We cannot find that the chancellor erred when she declined to find the Bank liable for abuse of process. There was no evidence that the Bank illegally used civil process. Likewise, there was no evidence that the Bank filed its complaint with an ulterior motive. The Bank’s sole motive appears to have been acquiring title to the Crawford lot. At the very least, there is no evidence that the Bank had any other motive. CHS and Harrell may have had the subjective personal opinion that the Bank’s suit was unwanted or burdensome to them, but that opinion — in and of itself — does not dictate the Bank’s motive in filing suit. It follows that the chancellor did not abuse her discretion when she declined to find the Bank liable of abuse of process. Accordingly, we find no merit to CHS’s and Harrell’s argument under this issue.

B. MALICIOUS PROSECUTION

¶ 23. Next, CHS and Harrell claim the chancellor erred when she declined to find the Bank liable for malicious prosecution. “An action for abuse of process differs from an action for malicious prosecution in that the latter is concerned with maliciously causing process to issue, while the former is concerned with the improper use of process after it has been issued.” Moon v. Condere Corp., 690 So.2d 1191, 1197 (Miss.1997) (quoting Turner, 319 So.2d at 236). The elements of a prima facie case of malicious prosecution are as follows:

(1) the institution or continuation of original judicial proceedings, either criminal or civil;
(2) by, or at the insistence of the defendants;
(3) the termination of such proceeding in plaintiffs favor;
(4) malice in instituting the proceeding;
(5) want of probable cause for the proceedings; and
(6) the suffering of injury or damages as a result of the action or prosecution.

Richard v. Supervalu, Inc., 974 So.2d 944, 948-49(¶ 14) (Miss.Ct.App.2008). CHS and Harrell were obligated to prove each element by a preponderance of the evidence. Van v. Grand Casinos, Inc., 724 So.2d 889, 891(¶ 8) (Miss.1998).

¶ 24. We cannot find that the chancellor abused her discretion when she declined to find the Bank liable for malicious prosecution. The Bank’s original action to confirm title did not terminate in CHS’s or Harrell’s favor. There was no evidence that the Bank had any malicious intent when it initiated its action to quiet title to the Crawford lot. Because CHS and Harrell failed to prove each element of a prima facie case of malicious prosecution by the preponderance of the evidence, we find no merit to this allegation.

C. DEFAMATION

¶ 25. Next, CHS and Harrell argue that the chancellor erred when she declined to find the Bank liable for defamation. According to CHS and Harrell, the Bank defamed them when it filed its quiet title action. However, “[statements made in connection with judicial proceedings, including pleadings, are, if in any way relevant to the subject matter of the action, absolutely privileged and immune from attack as defamation, even if such statements are made maliciously and with knowledge of their falsehood.” McCorkle v. McCorkle, 811 So.2d 258, 266(¶ 18) (Miss.Ct.App.2001). The Bank’s claims regarding its basis for its quiet title action were directly relevant to the subject matter of its lawsuit. Accordingly, though we do not find that the statements at issue were made maliciously or with knowledge of their falsehood, we must find that the statements at issue were privileged. It follows that we find no merit to this issue.

D. LITIGATION ACCOUNTABILITY ACT

¶ 26. In their final issue under this heading, CHS and Harrell claim that the chancellor erred when she found that the Bank was not liable for damages pursuant to the Litigation Accountability Act of 1988 as set forth in Mississippi Code Annotated sections 11-55-1 through -15. Mississippi Code Annotated section 11-55-5(1) (Rev. 2002) provides in pertinent part that:

the court shall award, as part of its judgment and in addition to any other costs otherwise assessed, reasonable attorney’s fees and costs against any party or attorney if the court, upon the motion of any party or on its own motion, finds that an attorney or party brought an action, or asserted any claim or defense, that is without substantial justification, or that the action, or any claim or defense asserted, was interposed for delay or harassment, or if it finds that an attorney or party unnecessarily expanded the proceedings by other improper conduct including, but not limited to, abuse of discovery procedures available under the Mississippi Rules of Civil Procedure.

¶ 27. A claim is without substantial justification when it is “frivolous, groundless in fact or in law, or vexatious, as determined by the court.” Miss.Code Ann. § ll-55-3(a) (Rev.2002). To determine whether a claim is frivolous, this Court looks to the definition of “frivolous” as set forth in Rule 11 of the Mississippi Rules of Civil Procedure. Leaf River Forest Prods., Inc. v. Deakle, 661 So.2d 188, 197 (Miss.1995). In the context of Rule 11, a claim is frivolous “only when, objectively speaking, the pleader or movant has no hope of success.” Stevens v. Lake, 615 So.2d 1177, 1184 (Miss.1993).

¶ 28. Once again, we cannot find that the chancellor erred when she declined to order the Bank to páy CHS and Harrell damages for a violation of the Litigation Accountability Act. The Bank’s initial action was not frivolous. Accordingly, CHS and Harrell were not entitled to an award pursuant to the Litigation Accountability Act. It follows that we find no merit to this allegation.

III. ATTORNEYS’FEES

¶ 29. In their final issue, CHS and Harrell claim the chancellor erred when she declined to order the Bank to pay CHS’s and Harrell’s attorneys’ fees. CHS’s and Harrell’s argument for attorneys’ fees is based largely on the concept that the Bank was liable for abuse of process, defamation, malicious prosecution, or damages pursuant to the Litigation Accountability Act of 1988. We have found no merit to CHS’s and Harrell’s arguments under those issues. Accordingly, we find no error in the chancellor’s decision to deny CHS’s and Harrell’s claims for attorneys’ fees.

ANALYSIS OF ISSUES ON CROSS-APPEAL

I. ATTORNEYS’FEES

¶ 30. In its initial and amended complaints, the Bank requested attorneys’ fees. The Bank concedes that it did not offer any proof regarding attorneys’ fees during its case-in-chief. However, the Bank moved the Court to reopen the proof to allow the Bank to put on proof of its attorneys’ fees. The chancellor granted the Bank’s request, and the Bank put on its proof. That decision is not challenged on appeal.

¶ 31. However, the chancellor ultimately decided not to order CHS or Harrell to pay the Bank’s attorneys’ fees. According to the chancellor, the Bank was not entitled to attorneys’ fees because attorneys’ fees were precluded by this Court’s decision in White v. Usry, 800 So.2d 125, 134(¶ 41) (Miss.Ct.App.2001), in which this Court held that a chancellor had no authority to award attorneys’ fees incident to a suit to confirm title and to remove a cloud on a title. The Bank claims the chancellor erred.

¶ 32. The Bank argues that its suit was more than a suit to confirm title and to remove a cloud on a title. Although it did not raise claims for breach of warranty or breach of contract in its initial complaint, the Bank raised those claims in its amended complaint. The Bank further notes that the chancellor expressly found that Harrell had breached the express warranty of title provided by the September 2000 deed of trust. The chancellor also found that “Harrell breached his contract with the Bank when he failed to pay the balance due on the promissory note after receipt of written demand for the same.” The Bank cites Howard v. Clanton, 481 So.2d 272, 276-77 (Miss.1985) in which the Mississippi Supreme Court held that attorneys’ fees may be recoverable where there has been a breach of a warranty deed and the purchaser was not divested of the land while adjudicating title.

¶ 33. Because the chancellor found that Harrell breached the express warranty of title as provided by the September 2000 deed of trust, and our precedent allows recovery of attorneys’ fees incident to such a claim, we must conclude that the chancellor erred when she held that the Bank could not recover attorneys’ fees. The Bank’s suit was more than an action to quiet and confirm title. We cannot ignore the chancellor’s finding that Harrell breached the express warranty of title. However, this Court is a reviewing court, and we are not situated to act as a fact-finder under these circumstances. We have merely found that the Bank is not precluded from recovering attorneys’ fees. We have not necessarily found that the Bank is entitled to such fees. Accordingly, although the Bank has put forth proof of its attorneys’ fees, we must remand this matter to the chancery court for a hearing regarding whether Harrell should be responsible for the Bank’s attorneys’ fees based on the chancellor’s findings that Harrell committed a breach of contract and a breach of the express warranty of title and, if so, the appropriate amount of those fees.

II. DEFICIENCY AMOUNT

¶ 34. The loan agreement between the Bank and Harrell provided that, in the event that Harrell defaulted on the loan, the Bank had the right to “obtain a deficiency judgment if the proceeds do not satisfy the debt.” The Bank claimed it was entitled to a deficiency judgment of $81,611.03. The chancellor declined to order Harrell to pay the Bank a deficiency judgment because the property had been appraised at more than $1,715,000 and the difference between the sale price and the appraised price was approximately $750,000. Therefore, there was sufficient equity in the land to satisfy the debt. The Bank claims the chancellor erred. We disagree.

¶ 35. Mississippi Code Annotated section 11-5-111 (Rev.2002) provides as follows:

Upon the confirmation of the report of sale of any property, real or personal, under a decree for sale to satisfy a mortgage, deed of trust, or other lien on such property, if there be a balance due to the complainant, the court, upon motion, shall give a decree against the defendant for any such balance for which by the record of the case he may be personally liable, upon which decree execution may issue.

A “mortgagee’s right to a deficiency decree is not absolute.” Lake Hillsdale Estates, Inc. v. Galloway, 473 So.2d 461, 466 (Miss.1985). “The mortgagee’s right to a deficiency decree usually depends on the facts and circumstances of each case, and, since the mortgaged premises constitute the primary fund for the payment of the mortgage debt, it is only where the mortgagee has endeavored to collect it out of the land that a just judgment for deficiency can be entered.” Id. In other words, “something more than a difference between the price paid at the foreclosure and the amount of the indebtedness must be demonstrated before the mortgagee is entitled to a deficiency judgment.” Id.

¶ 36. In Galloway, the Mississippi Supreme Court could not “conclude that the value of the property thereby obtained is insufficient to satisfy the indebtedness of the mortgagor.” Id. Consequently, the supreme court held that the trial court in Galloway prematurely granted a deficiency judgment upon a motion for a directed verdict. Id. The supreme court reversed the trial court and remanded for a new hearing “to first determine if the mortgagee has endeavored to collect the indebtedness out of the land.” Id. Assuming the mortgagee satisfied the first question, the supreme court directed the trial court, upon remand, to determine “whether the value of the property satisfies the debt of the mortgagor or creates a surplus.” Id.

¶37. The Bank claims that, despite the positive difference between the debt and the appraised value, it is nonetheless entitled to a deficiency judgment. The Bank’s reasoning is based on the fact that the Whitten Group purchased the property for no more than what the Bank paid at the foreclosure sale. However, as the chancellor noted, there was no evidence that the Bank sought to include the deficiency amount in the purchase price when it sold the property to the Whitten Group. To be clear, this opinion should not be construed as a finding that a deficiency judgment is only recoverable when a seller satisfies a prerequisite of demonstrating an attempt to recover a deficient amount. Instead, we merely find that, under the precise circumstances of this case, we cannot find that the chancellor abused her discretion when she declined to award a deficiency judgment. This issue lacks merit.

III. AMOUNT PAID TO REPURCHASE THE CRAWFORD LOT

¶ 38. After the Whitten Group purchased the property at issue and discovered the cloud on its title to the Crawford lot, the Whitten Group demanded that the Bank resolve the matter. The Bank repurchased an acre of property that included the Crawford lot, the Hardage lot, and a small.parcel of property that adjoined the two lots. Although the property had been appraised for $230,000, the Bank paid $264,000 for it. In its amended complaint, the Bank requested that the chancellor order Harrell to pay the $34,000 difference between the appraised price and the purchase price as indemnification to the Bank. However, the chancellor declined the Bank’s request. To be precise, the chancellor found as follows:

The settlement paid by the Bank was voluntary, and under current Mississippi law, an indemnitee such as the Bank cannot simply settle, and then send the indemnitor his share of the bill. It must, in the words of our rule, prove that it paid under compulsion. The evidence showed that the Bank settled simply because there was a potential for liability arising from a breach of warranty-

The Bank claims the chancellor erred. We agree.

¶ 39. “An obligation to indemnify may arise from a contractual relation, from an implied contractual relation, or out of liability imposed by law.” Hartford Cas. Ins. Co. v. Halliburton Co., 826 So.2d 1206, 1216(¶ 34) (Miss.2001). We can find no direct contractual obligation to indemnify on Harrell’s part. However, as mentioned above, the chancellor found that Harrell breached the express warranty of title that he tendered to the Bank. It follows that there was at least an implied contractual obligation to indemnify the Bank for any damages that might result from the Bank’s sale of the property after the foreclosure sale.

¶ 40. There are two “critical” prerequisites of a noncontractual implied indemnification obligation. Id. at (¶ 35). Those two prerequisites are: (1) that the damages a claimant seeks are imposed due to a legal obligation to the injured person, and (2) “[i]t must appear that the claimant did not actively or affirmatively participate in the wrong.” Id. As for the first prerequisite, the Bank definitely had a legal obligation to give the Whitten Group a clear title to the property it sold. As for the second prerequisite, we have found no evidence that the Bank “actively” participated in placing a cloud on the title to the Whitten Group. The Bank had a justifiable reason to believe that it had a clear title to the Crawford lot when it purchased the property at issue during the foreclosure sale. Harrell’s attorney, Wright, prepared a certificate of title and mistakenly stated that Harrell owned the title to the Crawford lot free from any encumbrances. Because the Bank satisfied the two prerequisites of an implied indemnification obligation and is not precluded from recovery, we may now consider whether the Bank demonstrated the elements of its claim.

¶ 41. To prevail on an indemnity claim, the Bank was obligated to prove that: “(1) it was legally liable to an injured third party, (2) it paid under compulsion, and (3) the amount it paid was reasonable.” Id. at (¶ 36). Without question, the Bank was legally liable to the Whitten Group. The Bank sold the Whitten Group property that the Bank did not actually own. The record does not contain any discussion of the third element, whether the amount paid was reasonable. However, under the circumstances, our resolution turns on the second element: whether the Bank paid under compulsion. The chancellor found that the Bank did not pay under compulsion because there was merely a potential for liability due to the Bank’s breach of warranty. Although we are mindful of the deferential standard of review, we must conclude that the chancellor erred.

¶ 42. “To constitute ‘compulsion’ ... rendering payment involuntary, there must be some actual or threatened exercise of power possessed, or supposedly possessed, by payee over payer’s person or property, from which payer has no means of immediate relief except by advancing money.” Black’s Law Dictionary 287 (6th ed.1990). The chancellor correctly stated the law in that one who seeks indemnity “cannot recover under this legal principle on the theory that [he] might have been liable to those with whom [he] settled if [he] had not settled with them.” Hartford Cas. Ins. Co., 826 So.2d at 1216-17(¶ 37). The Bank could not “simply settle, and then send the indemnitor his share of the bill.” Id. at 1217(¶ 38).

¶43. However, the law is also clear that the Bank was not obligated to litigate the matter as a prerequisite to indemnification. Id. The Bank “was entitled to use its own good judgment and effect [a] settlement of the ... claim.” Id. The Bank has never described its liability as “potential” as characterized by the chancellor. While the Bank’s liability may be characterized as “potential” in that it had not been adjudicated when settled, the Bank never denied that it was liable for breaching its express warranty of title as provided to the Whitten Group. Because the Bank would not have breached its warranty had Harrell not breached his own express warranty of title, we must find that the Bank was not precluded from obtaining a judgment for indemnification.

¶ 44. Be that as it may, we do not render a judgment for the Bank. Instead, because we are not suited to act as a fact-finder, we must remand this matter to the chancery court for a determination as to whether the amount paid was reasonable. If so, only then may the chancellor order Harrell to indemnify the Bank. Accordingly, we reverse the chancellor’s judgment incident to this issue and remand this matter to the chancellor for proceedings consistent with this opinion.

¶ 45. THE JUDGMENT OF THE LEAKE COUNTY CHANCERY COURT IS AFFIRMED ON DIRECT APPEAL AND, ON CROSS-APPEAL, AFFIRMED IN PART AND REVERSED AND REMANDED IN PART FOR FURTHER PROCEEDINGS CONSISTENT WITH THIS OPINION. ALL COSTS OF THIS APPEAL ARE ASSESSED EQUALLY BETWEEN THE APPELLANTS/CROSS-APPELLEES AND THE APPELLEE/CROSS-APPEL-LANT.

KING, C.J., LEE AND MYERS, P.JJ., IRVING, GRIFFIS, BARNES, ISHEE, CARLTON AND MAXWELL, JJ., CONCUR.

      . Harrell’s attorney provided the Bank with a preliminary certificate of title. The preliminary certificate of title indicated that Harrell would acquire the title to the Hardage lot, which was owned by CHS. Harrell's daughter, Blanche Gregory, was the sole owner of CHS.

      . During the foreclosure proceedings, Harrell conveyed what the Bank terms "the entire series of parcels, including the Crawford lot" to what the Bank calls a “straw man” entity. That entity immediately declared bankruptcy. The Bank acquired an order from the bankruptcy court allowing the foreclosure proceedings to continue.

      .For purposes of this opinion, we borrow the drafting attorney's description of the language at issue.

      . The chancellor's decision amounted to a finding that the Bank owned the title to the property because the Bank had repurchased the Crawford lot from the Whitten Group after the Whitten Group discovered the defect in its title to the Crawford lot.

      . According to the chancellor, “[Harrell] breached the express warranty of title given in the [d]eed of [t]rust dated September 14, 2000.”


source: Caselaw Access Project

author: LYONS, Justice. COBB, Chief Justice

license: Public Domain

text:
    HOLIDAY ISLE, LLC v. Beth ADKINS et al.
    1070202.
    Supreme Court of Alabama.
    May 23, 2008.

      C. William Daniels, Jr., Keith S. Rivers, and Thomas M. Wood of Bowron, Latta & Wasden, P.C., Mobile, for appellant.
    Winston R. Grow of Partridge, Smith, P.C., Mobile, for appellees.
   LYONS, Justice.

Holiday Isle, LLC, a developer of condominiums, appeals from a preliminary injunction entered by the Mobile Circuit Court preventing Holiday Isle from negotiating irrevocable letters of credit issued on behalf of J & R Investments, LLC, and Beth Adkins. See Rule 4(a)(1), Aia. R.App. P. Because the trial court exceeded its discretion in entering the injunction, we reverse and remand with instructions to dissolve the injunction.

I. Facts and Procedural History

On March 4, 2005, J & R Investments, LLC, agreed to purchase unit 105 and on March 7, 2005, Beth Adkins, David Adkins, and Nancy Whitten agreed to purchase unit 104 in a condominium complex being developed by Holiday Isle. J & R Investments, on the one hand, and Beth Adkins, David Adkins, and Nancy Whitten, on the other (hereinafter J & R Investments and the individual purchasers are referred to collectively as “the purchasers”), then entered into preconstruction purchase and escrow agreements with Holiday Isle for the condominium units, which were to be completed within two years of April 1, 2005. The purchase agreements provided that the earnest-money deposit could be satisfied by letters of credit issued to Holiday Isle in lieu of cash. The purchasers selected this option; J & R Investments delivered a letter of credit to Holiday Isle, and Beth Adkins, David Adkins, and Nancy Whitten delivered a letter of credit to Holiday Isle. The purchase agreements provided that upon default by the purchasers, Holiday Isle and/or an escrow agent “shall draw on the existing Letter of Credit in whole and create with the proceeds thereof a cash Deposit to be placed with Escrow Agent, with said funds to be delivered to [Holiday Isle] as liquidated damages.”

On March 28, 2007, the Town of Dauphin Island issued the certificate of occupancy for the condominiums. On April 2, 2007, the purchasers conducted a pre-clos-ing inspection of their respective condominium units. Within the following week the purchasers informed Holiday Isle that they would not close on their condominium units because, they said, Holiday Isle had not completed the condominiums by April 1, 2007, as required by the purchase agreements. The purchasers also requested that their letters of credit be returned to them. In response, Holiday Isle contended that it had met its obligations under the purchase agreements, and it set the closing date for the purchasers’ condominium units for April 30, 2007.

On April 27, 2007, Beth Adkins and J & R Investments requested that the Mobile Circuit Court issue a temporary restraining order (“TRO”) preventing Holiday Isle from drawing on the letters of credit. Contemporaneously with the filing of the application for the TRO, Beth Adkins, David Adkins, Nancy Whitten, and J & R Investments also sought a judgment declaring their rights under the purchase agreements, rescission of the purchase agreements, and an injunction preventing Holiday Isle from drawing on the letters of credit. On June 8, 2007, Holiday Isle moved to compel arbitration and dismiss or stay the proceedings. After a hearing on the motion on June 27, 2007, the trial court ordered the case to arbitration on July 30, 2007.

On October 11, 2007, Holiday Isle objected to the request for a TRO and an injunction by Beth Adkins and J & R Investments. Holiday Isle argued that the trial court lacked jurisdiction to enter an injunction against it because, it said, the arbitrator now had jurisdiction over all the disputes in the case. In the alternative, Holiday Isle argued that the purchasers could not satisfy the requirements for obtaining a TRO or an injunction. The purchasers replied that the trial court retained jurisdiction to enter an injunction and that the requirements for obtaining injunctive relief had been satisfied.

On October 18, 2007, the trial court appointed an arbitrator to resolve all the disputes between the parties and issued a preliminary injunction to prevent Holiday Isle from negotiating the letters of credit. The trial court’s order states that “[because the Letters of Credit are inextricably intertwined with the arbitration issues, the Court hereby ENJOINS the negotiation of the Letters of Credit by whoever is holding them, until this matter is resolved by the arbitrator.” (Capitalization in original.) Holiday Isle appealed the trial court’s entry of the preliminary injunction to this Court.

II. Standard of Review

We have often stated: “The decision to grant or to deny a preliminary injunction is within the trial court’s sound discretion. In reviewing an order granting a preliminary injunction, the Court determines whether the trial court exceeded that discretion.” SouthTrust Bank of Alabama, N.A. v. Webb-Stiles Co., 931 So.2d 706, 709 (Ala.2005).

A preliminary injunction should be issued only when the party seeking an injunction demonstrates:

“‘(1) that without the injunction the [party] would suffer irreparable injury; (2) that the [party] has no adequate remedy at law; (3) that the [party] has at least a reasonable chance of success on the ultimate merits of his case; and (4) that the hardship imposed on the [party opposing the preliminary injunction] by the injunction would not unreasonably outweigh the benefit accruing to the [party seeking the injunction].’ ”

Ormco Corp. v. Johns, 869 So.2d 1109, 1113 (Ala.2003)(quoting Perley v. Tapscan, Inc., 646 So.2d 585, 587 (Ala.1994)).

To the extent that the trial court’s issuance of a preliminary injunction is grounded only in questions of law based on undisputed facts, our longstanding rule that we review an injunction solely to determine whether the trial court exceeded its discretion should not apply. We find the rule applied by the United State Supreme Court in similar situations to be persuasive: “We review the District Court’s legal rulings de novo and its ultimate decision to issue the preliminary injunction for abuse of discretion.” Gonzales v. O Centro Espinta Beneficente Uniao do Vegetal, 546 U.S. 418, 428, 126 S.Ct. 1211, 163 L.Ed.2d 1017 (2006); see also Justice Murdock’s special writing while sitting as a judge on the Court of Civil Appeals in City of Dothan v. Eighty-Four West, Inc., 871 So.2d 54, 60 (Ala.Civ.App.2003) (Murdock, J., concurring specially on application for rehearing) (cited with approval in McGlathery v. Richardson, 944 So.2d 968, 970 (Ala.Civ.App.2006)). To the extent they conflict with our holding today, previous expressions such as the one found in TFT, Inc. v. Warning Systems, Inc., 751 So.2d 1238, 1241-42 (Ala.1999) (“The applicable standard of review [of injunctive relief] depends on whether the trial court entered a preliminary injunction or a permanent injunction. A preliminary injunction is reviewed under an abuse-of-discretion standard, whereas a permanent injunction is reviewed de novo.”) are hereby overruled.

III. Analysis

A. Jurisdiction

We must first determine whether the trial court had jurisdiction to issue the preliminary injunction after it ordered the dispute to arbitration. Holiday Isle contends that the trial court retained only limited jurisdiction once it compelled arbitration because, it says, the arbitration clause, which is identical in all the purchase agreements, does not reseiwe to the trial court any jurisdiction for temporary or preliminary equitable relief. Holiday Isle relies on the decision of the United States Court of Appeals for the Eighth Circuit in Manion v. Nagin, 255 F.3d 535, 538-39 (8th Cir.2001), holding that “[i]n a case involving the Federal Arbitration Act (FAA), courts should not grant injunctive relief unless there is ‘qualifying contractual language’ which permits it.” Because, Holiday Isle asserts, the purchase agreements do not contain “qualifying contractual language” permitting the trial court to grant injunctive relief, the purchase agreements provide no grounds for the trial court to issue the preliminary injunction.

The purchasers respond by arguing that because, when the trial court entered the preliminary injunction, the case was not under the jurisdiction of any arbitration association and an arbitrator had not been selected, “[t]he trial court, in essence, was the only forum by which these matters could be resolved.” Purchasers’ brief at p. 23. The purchase agreements expressly provide that any arbitration proceedings shall not be conducted through the American Arbitration Association (“AAA”). However, the purchasers note that the purchase agreements also provide that disputes are to be submitted to arbitration under the Commercial Rules of the AAA or as the parties may later agree in writing. The purchasers further note that the Commercial Arbitration Rules of the AAA allow a party to seek interim measures from a judicial authority. Rule R-34(c) of the AAA’s Commercial Rules provides: “A request for interim measures addressed by a party to a judicial authority shall not be deemed incompatible with the agreement to arbitrate or a waiver of the right to arbitrate.” Nothing before us indicates that the parties, by agreement entered into after the purchase agreements, displaced the choice of the AAA’s Commercial Rules set forth in the purchase agreements.

The purchasers also note that in Drago v. Holiday Isle, L.L.C., 537 F.Supp.2d 1219 (S.D.Ala.2007), Holiday Isle also relied upon Nagin to argue that the federal district court lacked jurisdiction to issue an injunction because the case had been stayed pending arbitration. The court in Drago found that Nagin reflected a minority view and noted that the “majority of federal courts ... have concluded that in limited situations a binding arbitration clause does not bar a plaintiff from seeking emergency injunctive relief or other provisional remedies in court.” 537 F.Supp.2d at 1221. The court in Drago specifically adopted the reasoning of the Fourth Circuit Court of Appeals in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bradley, 756 F.2d 1048, 1052 (4th Cir.1985), as a basis for concluding that it may order equitable relief “where an arbitral award could not return the parties substantially to the status quo.” 537 F.Supp.2d at 1222. Here, if the trial court’s preliminary injunction was appropriately issued, it could be said that an arbitral award would not return the parties to the status quo where the proceeds of the letters of credit had previously been disbursed to the beneficiary.

We therefore apply the Commercial Rules of the AAA pursuant to the express terms of the purchase agreements and conclude that the trial court had jurisdiction to enter a preliminary injunction to order equitable relief to preserve the status quo. Whether the trial court erred in entering that injunction under the facts of this case is a separate issue.

B. Merits

A letter of credit exists independently of the underlying contract between a buyer and seller. See Benetton Servs. Corp. v. Benedot, Inc., 551 So.2d 295, 299 (Ala.1989); Southern Energy Homes, Inc. v. AmSouth Bank of Alabama, 709 So.2d 1180, 1185 (Ala.1998). “A letter of credit is a financing engagement by an issuing bank, made at the request of an applicant (or customer), to honor demands for payment by the beneficiary of the credit, provided the terms and conditions of the letter of credit are met.” Southern Energy Homes, Inc., 709 So.2d at 1184 (citing § 7-5-103(1)(a), Ala.Code 1975 (definition for “letter of credit” now found at § 7-5-102(a)(10))). “The beneficiary of the standby credit reasonably expects to receive payment from the issuer promptly upon demand and before any litigation between the applicant and the beneficiary may occur.” 709 So.2d at 1184 (citing John Dolan, The Law of Letter of Credit: Commercial and Standby Credits ¶¶ 3.06 & 3.07 (rev. ed.1996)). Thus, parties choose a letter of credit over other types of financing “so that they may have the benefit of prompt payment before any litigation occurs.” 709 So.2d at 1185 (emphasis added).

Holiday Isle contends that the trial court erred in enjoining it from negotiating the letters of credit because, it says, Alabama law is well settled that the unique nature of letters of credit and their role in the financial community makes enjoining a letter of credit inappropriate. Holiday Isle asserts that this Court has reversed every injunction issued by a trial court preventing a beneficiary from drawing on a letter of credit. See SouthTrust Bank of Alabama, N.A., 931 So.2d at 709, Textron Fin. Corp. v. Hayes, 619 So.2d 1363 (Ala.1993), Benetton Seros. Corp., 551 So.2d at 299. Holiday Isle also notes that in Southern Energy Homes, Inc., 709 So.2d at 1185-86, this Court held:

“We recognize that, as a general rule, letters of credit cannot exist without independence from the underlying transaction. [John Dolan, The Law of Letter of Credit: Commercial and Standby Credits ] at ¶ 2.09[5] [ (rev. e.1996) ]. Thus, when courts begin ‘delving into the underlying contract, they are impeding the swift completion of the credit transaction.’ Id. ‘The certainty of payment is the most important aspect of a letter of credit transaction, and this certainly encourages hesitant parties to enter into transactions, by providing them with a secure source of credit.’ Am-South v. Martin, 559 So.2d [1058] at 1062 [ (Ala.1990) ].”

In Southern Energy Homes, Inc., this Court went on to note that in a letter-of-credit transaction the parties “bargain for the advantages and disadvantages of the credit” and held that the trial court did not exceed its discretion by denying the applicant’s motion for a preliminary injunction preventing the issuer from paying the letter of credit. 709 So.2d at 1187-88.

The purchasers argue that the fact that the present case deals with the purchase of condominium units, which is governed by the Alabama Uniform Condominium Act, § 35-8A-101 et seq., Ala.Code 1975 (“the AUCA”), distinguishes it from this Court’s precedent holding that it is inappropriate to enjoin the negotiation of letters of credit. The purchasers note that the letters of credit satisfied the earnest-money deposit on the purchase of the condominium units and note that § 35-8A-410, Ala.Code 1975, titled “Escrow of deposits,” provides that a deposit for the purchase of a condominium unit is held by an escrow agent until “(i) delivered to the declarant at closing; (ii) delivered to the declarant because of purchaser’s default under a contract to purchase the unit; or (iii) refunded to the purchaser.” The purchasers further contend that an escrow account established under the AUCA, and the rights created by it, differ from a letter-of-credit situation in which there is a simple contractual agreement that the letter of credit will be paid upon demand. The purchasers contend that under the AUCA the letter of credit is deposited into an escrow account that is similar to a trust fund and can be drawn upon only if the developer of the condominium has shown that the buyer has defaulted. Thus, the purchasers assert that their letters of credit do not exist independently of the underlying transaction to purchase the condominiums and note that the Alabama Commentary to § 35-8A-410 states:

“The act provides that the account holder shall deliver these funds to the developer only at a sale closing or ‘because of the purchaser’s default under a contract to purchase the unit.’ Thus, the depository party has a duty of some care in being persuaded by a developer that the buyer has defaulted, at least where the buyer has notified the depository party of a conflicting position.”

(Emphasis added.) The purchasers argue that allowing Holiday Isle to draw on the letters of credit when they contest their default would violate § 35-8A-410.

Holiday Isle responds by arguing that the purchasers’ argument that their letters of credit are different from an escrow deposit under § 35-8A-410 because the underlying transaction involves the sale of condominium units is meritless and has no legal support. We agree. Section 35-8A-410 provides that “[a]ny deposit made in connection with the purchase of a [condominium] unit” shall be held in escrow “by a licensed title insurance company, an attorney, a licensed real estate broker, or an institution whose accounts are insured by a governmental agency or instrumentality until (i) delivered to the declarant at closing; (ii) delivered to the declarant because of the purchaser’s default under a contract to purchase the unit; or (iii) refunded to the purchaser.” Such language does not operate to preclude the parties from entering into an agreement in which, in lieu of an earnest-money deposit, a standby letter of credit is issued by a neutral bank and is payable to the beneficiary upon the purchaser’s default.

The well-reasoned jurisprudence of this Court condemning injunctions against drawing upon letters of credit is fundamental and applies to the purchasers’ failure to close on the sale of the condominium units. If the proceeds of the letters of credit are disbursed and the purchasers’ default cannot later be established, the purchasers’ remedy is an action at law against the beneficiary of the letters of credit or perhaps against the depository party for want of due care in honoring the demand for payment as suggested by the Alabama Commentary to § 35-8A-410, an issue not before us. Any other construction of the terms of the standby letters of credit would constitute judicial redrafting of the terms of the purchase agreements, which we decline to do.

We hold that the trial court’s rationale that the negotiation of the letters of credit should be enjoined because “the Letters of Credit are inextricably intertwined with the arbitration issues” is contrary to the well-settled law that letters of credit exist independently from the underlying transaction. See Benetton Servs. Corp., 551 So.2d at 298-99, Southern Energy Homes, Inc., 709 So.2d at 1185-86. The purchasers bargained for the advantages and disadvantages of electing to use a letter of credit in lieu of cash to satisfy their earnest-money deposit on the purchase of the their condominium units, and the fact that the AUCA provides that a deposit for a condominium unit is kept until default occurs does not protect a purchaser from the universal rule that an injunction preventing a beneficiary from drawing on a letter of credit is inappropriate. “The certainty of payment is the most important aspect of a letter of credit transaction, and this certainty encourages hesitant parties to enter into transactions, by providing them with a secure source of credit.” AmSouth Bank, N.A. v. Martin, 559 So.2d 1058, 1062 (Ala.1990). Accordingly, we hold that the trial court erred in granting the purchasers’ motion for a preliminary injunction.

IV. Conclusion

The order of the trial court entering the preliminary injunction is reversed, and the case is remanded with instructions to dissolve the preliminary injunction.

REVERSED AND REMANDED WITH INSTRUCTIONS.

SEE, WOODALL, STUART, SMITH, BOLIN, and PARKER, JJ., concur.

MURDOCK, J., concurs in the result.

COBB, C.J., dissents.

COBB, Chief Justice

(dissenting).

I respectfully dissent. Although I agree with the majority that we should entertain reviewing a trial court’s preliminary injunction under a de novo rather than ex-eess-of-discretion standard, the circumstances in this case do not warrant such a change. Fundamental fairness is'denied the parties in this case by not allowing them to brief and argue their respective positions with an understanding of the appropriate standard of appellate review. The parties did not know that this Court would conclude that the facts presented here would'be deemed undisputed and that the preliminary injunction would be subjected to a de novo review. Indeed, the parties are likely to be as surprised as I am that the majority, with little discussion and no fanfare, finds the facts to be undisputed. Logic dictates that if the facts were undisputed, Holiday Isle would have, instead of filing a motion to compel arbitration and dismiss or stay the proceedings, filed a motion for a summary judgment, which in the absence of a genuine issue of material fact, would have presented the query whether Holiday Isle was entitled to a judgment as a matter of law. The trial court would not have ordered this case to arbitration or enjoined the negotiation of the letters of credit had it not concluded that the facts are in dispute, particularly with respect to the underlying issue — whether the condominium units were completed within two years of April 1, 2005, in accordance with the terms of the purchase agreements.

The parties have not presented this Court with any definitive findings or conclusions about the record, and significant material differences exist about the facts to dissuade me from applying a de novo review to the preliminary injunction. On April 2, 2007, a date that was already beyond the two-year completion term, when the purchasers conducted the pre-closing inspection of their respective units, they were instructed upon their arrival to wear hard hats or they would not be allowed to enter the premises. Once inside the condominium complex, the purchasers were met with a reception area that was not glassed in, an elevator that did not appear in working condition, and an incomplete parking deck. When they reached their designated units, 104 and 105, the purchasers found laborers still performing work. Holiday Isle does not deny that the construction tasks noted by the purchasers were not finished or that as of April 2, 2007, no unit owner had been permitted to occupy the condominium or even allowed ingress or egress without an escort and a hard hat. Holiday Isle refused to return the letters of credit after the purchasers notified it that because the units had not been completed within two years of April 1, 2005, the purchase agreements were void. The purchasers demanded the return of their earnest-money deposit, i.e., their letters of credit. Holiday Isle refused to return the letters of credit and instead scheduled a closing date for April 80, 2007. Holiday Isle contends that the work remaining to be done on the units consisted only of “punch list items.”

The purchasers performed another inspection of Holiday Isle on April 23, 2007. They found unit 105 in much the same condition as it had been on April 2, 2007. At this time, the inspection of unit 105 also revealed problems with paint and other defects. As for the condominium complex itself, the purchasers noted that the pool and parking garage were incomplete and that there were no permanent handrails on the stairs. The purchasers were asked to leave the premises before they could complete their inspection.

The facts concerning the ultimate holder of the letters of credit are also troubling. Section 4 of the purchase agreements provides that “Bay Title Insurance Company, Inc. shall be the Escrow Agent.” On April 27, 2007, counsel for the purchasers wrote the escrow agent, Bay Title, informing it that the purchasers were contesting any finding that they had defaulted under the purchase agreements. Subsequently, the purchasers became aware that Bay Title had resigned as escrow agent, and the letters of credit were being held by Surety Land Title, Inc. On July 13, 2007, Surety Land Title delivered the letters of credit to Holiday Isle “since it did not have any written authority to hold the letters of credit nor any authority to draw on them.” The purchasers dispute that the purchase agreements or letters of credit were modified in any way so as to authorize the appointment of a new escrow agent, including Surety Land Title. It is undisputed that Holiday Isle now possesses the letters of credit. In support of the motion for a preliminary injunction, the purchasers submitted evidence to the trial court supporting the reasons for their concern about the financial viability of Holiday Isle. The trial court was provided information about subcontractors’ liens and other lawsuits and/or arbitration proceedings pending and/or threatened against Holiday Isle in connection with the condominium complex.

Although precedent establishes that a letter of credit generally exists independently of the underlying contract between a buyer and a seller, none of the cases the majority discusses involve a factual scenario, such as this one, that is governed by the Alabama Uniform Condominium Act, § 35-8A-101 et seq., Ala.Code 1975 (“the AUCA”). As the majority acknowledges, a deposit for the purchase of a condominium unit, whether cash or a letter of credit, is to be held by an escrow agent until closing, until the purchaser defaults, or until the deposit is refunded to the purchaser. The trial court entered the preliminary injunction in this case enjoining Holiday Isle from negotiating the letters of credit until after the factual disputes are resolved by the appointed arbitrator in arbitration requested by Holiday Isle and compelled by the trial court. I agree with the trial court that the letters of credit “are inextricably intertwined with the arbitration issues.” By holding that the trial court erred in granting the purchasers’ motion for a preliminary injunction, the majority has also effectively interfered with the arbitration of the ultimate issue. The letters of credit in this case were “in lieu” of the earnest-money deposit for the purchase of the condominium units under § 2(B) of the purchase agreements. According to § 35-8A-410, Ala.Code 1975, titled “Escrow of deposits,” deposits in connection with the purchase of a condominium unit shall be held in escrow “by a licensed title insurance company, an attorney, a licensed real estate broker or an institution whose accounts are insured by a governmental agency or instrumentality until (i) delivered to the declarant at closing; (ii) delivered to the declarant because of the purchaser’s default under a contract to purchase the unit; or (iii) refunded to the purchaser.”

The escrow deposits mandated by § 35-8A-410 do not present an ordinary letter-of-credit situation. According to the Alabama Commentary to § 35-8A-410, the funds held in escrow are similar to a trust fund: “Equally important, the funds on deposit should he regarded in a manner somewhat similar to a trust fund, such that creditors of the developer, whether the construction lender, material suppliers or contractors, may not reach these funds to satisfy their claims against an insolvent developer.” (Emphasis added.) If Holiday Isle is allowed, as the majority holds, to negotiate the letters of credit before arbitration is completed, the purpose of the Alabama Legislature in enacting § 35-8A-410 will be frustrated. The possibility exists that, before the parties can arbitrate their dispute, creditors of Holiday Isle may make a claim on the letters of credit as soon as they are converted to cash. As argued throughout the purchasers’ brief, the injunction in this case provides a close analogy, both legally and equitably, to a constructive trust. The constructive-trust-fund nature of the letters of credit will be lost as soon as the preliminary injunction is dissolved.

In questionable violation of § 35-8A-410 of the AUCA, Holiday Isle is now acting as the escrow agent. This undisputed fact makes the need for a preliminary injunction, in order to avoid irreparable harm to the purchasers, of paramount importance. Under the express terms of the purchase agreements and § 35-8A-410, Holiday Isle is not an authorized escrow agent. An escrow agent is generally considered to be the agent of both parties to an escrow agreement. See Fisher v. Comer Plantation, Inc., 772 So.2d 455 (Ala.2000); Gurley v. Bank of Huntsville, 349 So.2d 43 (Ala.1977). With Holiday Isle in possession of the letters of credit instead of Bay Title, the “licensed title insurance company” agreed upon by the parties, the purchasers have lost the benefit of a neutral escrow agent, the entity charged with maintaining the escrow trust fund with due care. This scenario creates the need for the preliminary injunction prohibiting Holiday Isle from negotiating the letters of credit without a favorable ruling from the arbitrator.

Because Holiday Isle has appealed the order of the trial court issuing the preliminary injunction, as soon as the trial court dissolves the preliminary injunction on remand, Holiday Isle will presumably negotiate the letters of credit in its possession before arbitration is completed. If the arbitrator finds a genuine and material factual dispute over whether Holiday Isle completed the condominium units within the defined two-year period and then rules in favor of the purchasers, the dissolution of the preliminary injunction may have caused irreparable harm to the purchasers. The majority chooses not to address this potential outcome other than to propose “the purchasers’ remedy is an action at law against the beneficiary of the letters of credit [Holiday Isle] or perhaps against the depository party for want of due care in honoring the demand for payment as suggested by the Alabama Commentary to § 35-8A-410.” 12 So.3d at 1179. This conclusory statement by the majority does not address the legitimate concern of the purchasers that Holiday Isle may not be able to pay a future monetary judgment in their favor if Holiday Isle is allowed to negotiate the letters of credit before arbitration is completed. Nor does the majority address the quandary presented by the fact that Holiday Isle, rather than the agreed upon escrow agent, Bay Title, is in possession of the letters of credit.

Inadequacy of a remedy at law justifying an injunction may arise from the insolvency of the defendant. Martin v. First Federal Sav. & Loan Ass’n of Andalusia, 559 So.2d 1075 (Ala.1990) (preliminary injunction issued against a mortgage servicing company in financial difficulty that was continuing to collect mortgage payments after its servicing contract was terminated); Shelton v. Shelton, 238 Ala. 489, 192 So. 55 (1939). When a defendant, as here, is the holder of a property interest and its holding of that interest is disputed as unjust, unconscionable, or unlawful, a constructive trust can be imposed. See Ex parte Morton, 261 Ala. 581, 75 So.2d 500 (1954). However, in order to obtain a constructive trust, it is not essential to prove the inadequacy of a remedy at law. 261 Ala. at 592, 75 So.2d at 511. The issue whether a constructive trust results is one of fact. Pollution Controh-Walther, Inc. v. Belzer, 406 So.2d 372 (Ala.1981). Constructive trusts can and have been imposed. See Holman v. Kruk, 485 So.2d 715 (Ala.1986) (constructive trust imposed upon minor’s Social Security funds that sister had spent); Snellings v. Builders’ Supply Co., 228 Ala. 47, 152 So. 459 (1934) (constructive trust imposed upon proceeds of mortgage created for benefit of plaintiffs).

The preliminary injunction issued by the trial court in the instant case is tantamount to a constructive trust over the letters of credit, especially in light of the fact that Holiday Isle, instead of a neutral escrow agent as required by § 35-8A-410, exercises control over the letters. A preliminary injunction has been found to be appropriate to preserve the status quo and to prevent dissipation of funds in a constructive trust when there are specific identifiable funds that the defendant has refused to turn over. See Georgia Banking Co. v. GMC Lending & Mortgage Servs. Corp., 923 So.2d 1224 (Fla.Dist.Ct.App.2006). The letters of credit at issue involve specific identifiable funds of the purchasers, akin to “trust funds,” as explained by the Alabama Commentary to § 35-8A-410.

Under our precedent, a preliminary injunction may be issued when: (1) the requesting party would suffer irreparable harm without the injunction; (2) the requesting party has no adequate remedy at law; (3) the requesting party has at least a reasonable chance of success on the ultimate merits; and (4) the hardship imposed on the adverse party would not unreasonably outweigh the benefit accruing to the requesting party. SouthTrust Bank of Alabama, N.A. v. Webb-Stiles Co., 931 So.2d 706, 708 (Ala.2005) (quoting Ormco Corp. v. Johns, 869 So.2d 1109, 1113 (Ala.2003), quoting in turn Perley v. Tapscan, Inc., 646 So.2d 585, 587 (Ala.1994)). In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bradley, 756 F.2d 1048, 1052 (4th Cir.1985), the United States Court of Appeals for the Fourth Circuit held that equitable relief is appropriate when an arbitral award could not return the parties substantially to the status quo, particularly if the enjoined conduct would render the arbitration process a “hollow formality,” i.e., “ ‘the arbitral award when rendered could not return the parties substantially to the status quo ante.’ ” (Quoting Lever Bros. v. International Chem. Workers Union, Local 217, 554 F.2d 115, 123 (4th Cir.1976).) The majority of federal courts to rule on the question have concluded that in limited situations a binding arbitration agreement does not bar a plaintiff from seeking emergency injunctive relief or other provisional remedies. Performance Unlimited, Inc. v. Questar Publishers, Inc., 52 F.3d 1373 (6th Cir.1995). Clearly, in the instant case, the only way to preserve the status quo is to enjoin Holiday Isle from negotiating the letters of credit until after the arbitrator rules on the ultimate issue — whether either party violated the purchase agreements.

The majority’s conclusion is in conflict with the purpose and intent of the AUCA. Because of the length of time needed to complete a new condominium complex, it is common practice for letters of credit rather than cash deposits to be used to secure preconstruction agreements. The majority’s holding that such letters of credit are not directly tied to the underlying purchase agreements may thwart the use of such financing arrangements in the future. Thus, I disagree that this case warrants a change in the standard of review for a preliminary injunction. In determining if a trial court properly issued a preliminary injunction, the standard of review is whether the trial court exceeded its discretion in doing so. Baldwin County Elec. Membership Corp. v. Catrett, 942 So.2d 337, 344 (Ala.2006) (“‘[I]f it cannot be shown that the trial court exceeded its discretion in either granting or refusing to grant a preliminary injunction, the court’s “action will not be disturbed on appeal.” ’ ” (quoting Johnson v. Willis, 893 So.2d 1138, 1141 (Ala.2004), quoting in turn Teleprompter of Mobile, Inc. v. Bayou Cable TV, 428 So.2d 17, 19 (Ala.1983))). A trial court exceeds its discretion when it “exceed[s] the bounds of reason, all the circumstances before the lower court being considered.” Valley Heating, Cooling, & Elec. Co. v. Alabama Gas Corp., 286 Ala. 79, 82, 237 So.2d 470, 472 (1970).

The record before this Court establishes that the purchasers have a reasonable chance of success on the ultimate merits and that Holiday Isle has not set forth evidence of any undue hardship it will endure by waiting for arbitration, a proceeding affirmatively sought by Holiday Isle, to be completed. In light of the material facts in dispute, which are inextricably intertwined with the letters of credit, combined with the possibility of irreparable harm to the purchasers if the status quo is not maintained, I cannot conclude that the trial court exceeded its discretion in issuing the preliminary injunction pending the outcome of arbitration. Accordingly, I dissent.

      . Chief Justice Cobb's challenge in her dissent to the fairness of the majority's sua sponte clarification of the standard of review proceeds on the false premise that adherence to the former standard would yield a different result.

      . Chief Justice Cobb's dissenting opinion accepts the purchasers’ contention that the letters of credit are tantamount to trust funds, relying on the Alabama Commentary to § 35-8A-410 dealing with protection of creditors of the developer such as "the construction lender, material suppliers or contractors.” Of course, the purchasers are not within that category.

      . The dissenting opinion recites factual disputes that are germane to the merits of the underlying controversy that gives rise to the request for injunctive relief. The relevance of these contested facts to a proceeding to enjoin the issuer from honoring a letter of credit is limited to the circumstances set forth in § 7-5-109, Ala.Code 1975, authorizing an injunction to prevent a material fraud by the beneficiary. This Court is committed to a narrow interpretation of the fraud exception to the general rule against the issuance of injunctions in letter-of-credit transactions. See Southern Energy Homes, Inc., 709 So.2d at 1186 ("The extensive use of the fraud exception may operate to transform the credit transaction into a surety contract.”). The commentary to § 7-5-109 describes extreme fact patterns illustrative of when the fraud exception applies, such as " ‘[wjhere the circumstances “plainly ” show that the underlying contract forbids the beneficiary to call a letter of credit; where they show that the contract deprives the beneficiary of even a “colorable ” right to do so; where the contract and circumstances reveal that the beneficiary’s demand for payment has "absolutely no basis in fact”; where the beneficiary’s conduct has “so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligation would no longer be served.” ' " (quoting Ground Air Transfer v. Westates Airlines, 899 F.2d 1269, 1272-73 (1st Cir.1990) (citations omitted)). No allegation of fraud is presented here. Further, the trial court's sole justification for issuing the injunction was based on its conclusion that "the Letters of Credit are inextricably intertwined with the arbitration issues.” Consequently, the mere presence of factual disputes as to the merits of the underlying controversy in this proceeding does not justify affirming the award of injunctive relief.

      . The record contains a letter from counsel for Surety Land Title, Inc., which states that Surety had come into possession of the purchasers' letters of credit at some point after Bay Title Insurance Company, the escrow agent described in the purchase agreements, had resigned. No document from Bay Title corroborating Surety's assertion of Bay Title's resignation appears in the record. The dissenting opinion states: "With Holiday Isle in possession of the letters of credit instead of Bay Title, the 'licensed title insurance company' agreed upon by the parties, the purchasers have lost the benefit of a neutral escrow agent, the entity charged with maintaining the escrow trust fund with due care. This scenario creates the need for the preliminary injunction prohibiting Holiday Isle from negotiating the letters of credit without a favorable ruling from the arbitrator.” 12 So.3d at 1183. Even assuming Bay Title had in fact resigned as escrow agent, the controversy over the status of Bay Title or the authority of Surety as its successor is immaterial because the purchase agreements provide that the letters of credit were to be delivered to Holiday Isle and were merely “assignable” to the escrow agent. The purchase agreements state: "At Purchaser'[s] election, in lieu of cash for satisfaction of the Earnest Money Deposit, Purchaser, simultaneously with the execution of this Agreement, may deliver to Developer (as beneficiary), and assignable by Developer to Escrow Agent, a standby letter of credit .... ” The terms of the letters of credit issued by the purchasers' respective banks authorized Holiday Isle to make demand for payment directly upon the banks. Holiday Isle now has possession of the letters of credit. The dissenting opinion assumes, without foundation in the purchase agreements, that Holiday Isle was required to use the services of an escrow agent and that otherwise the purchasers have no neutral party, when the banks that issued the letters of credit have such status.

      . For example, principles of fundamental fairness and due process required this Court to limit the well-settled rule that this Court may affirm a summary judgment it determines is correct even when the trial court has based the summary judgment on an incorrect legal analysis to those situations in which both sides have received notice and an opportunity to address the bases of the summary judgment. See Liberty Nat'l Life Ins. Co. v. University of Alabama Health Servs. Found., P.C., 881 So.2d 1013, 1020 (Ala.2003). In this case, the parties could not reasonably have anticipated that this Court would change the standard of review for a preliminary injunction; they have had no opportunity to frame their arguments in light of the new standard. Similarly, the change in the standard of review implemented by the Court in the majority opinion cannot be applied fairly to the parties in this case, even if the Court chooses to apply that change prospectively.