Thomas A. Carpenter v. The Cincinnati Specialty Underwriters Insurance Company

FILED
Sep 08 2016, 9:19 am
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
ATTORNEY FOR APPELLANTS ATTORNEYS FOR APPELLEE
Mark A. Matthes David S. Wirth
Yoder Ainlay Ulmer & Buckingham, Fairfield, Ohio
LLP Kristine Lindley
Goshen, Indiana Richard R. Skiles
Skiles DeTrude
Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
Thomas A. Carpenter, September 8, 2016
Appellant-Plaintiff, Court of Appeals Case No.
33A01-1602-CT-265
v. Appeal from the Henry Circuit
Court
Lovell’s Lounge and Grill, LLC The Honorable Mary G. Willis,
and Jerry Dean Johnson, Judge
Defendants, Trial Court Cause No.
33C01-1308-CT-27
and
The Cincinnati Specialty
Underwriters Insurance
Company, a subsidiary of the
Cincinnati Insurance
Companies,
Garnishee-Defendant
______________________________
Court of Appeals of Indiana | Opinion 33A01-1602-CT-265 | September 8, 2016 Page 1 of 26
The Cincinnati Specialty
Underwriters Insurance
Company,
Appellee-Plaintiff,
v.
Thomas A. Carpenter, Lovell’s
Lounge and Grill, LLC, and
Jeremy Lovell d/b/a Lovell’s
Lounge and Grill,
Appellants-Defendants
Crone, Judge.
Case Summary
[1] This case arises from an incident at Lovell’s Lounge and Grill, in which
Thomas A. Carpenter was injured by Jerry Dean Johnson. Carpenter, Lovell’s
Lounge and Grill, LLC, and Jeremy Lovell d/b/a Lovell’s Lounge and Grill
(collectively “Appellants”) appeal the judgment in favor of The Cincinnati
Specialty Underwriters Insurance Company (“CSU”) on its action seeking a
declaratory judgment regarding its obligations under its insurance policy with
Lovell’s Lounge. In that judgment, the trial court found that CSU had no
obligation to make payments under a consent judgment (“the Consent
Judgment”), in which Carpenter and Lovell’s Lounge agreed that Carpenter’s
injuries were caused by Lovell’s Lounge negligence or that Lovell’s Lounge was
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vicariously liable for Johnson’s negligence. Appellants argue that the trial court
erred in finding that the Consent Judgment was the product of bad faith or
collusion, and therefore collateral estoppel does not require CSU to be bound
by the determinations of liability and damages in the Consent Judgment.
Because we conclude that CSU has carried its burden to show by clear and
convincing evidence that the Consent Judgment was the product of bad faith or
collusion, we conclude that the trial court did not err in finding that collateral
estoppel does not require CSU to be bound by the Consent Judgment.
Therefore, we affirm.
Facts and Procedural History
[2] Lovell’s Lounge operates Lovell’s Lounge and Grill (“the Lounge”) in New
Castle. Jeremy Lovell is the registered agent for Lovell’s Lounge. In May
2012, Carpenter went to the Lounge, and within moments of entering, he was
injured by Jerry Dean Johnson (“the Incident”). Johnson was charged with
class C felony battery resulting in serious bodily injury for his actions in injuring
Carpenter. At the trial, Carpenter testified that upon entering the Lounge, he
heard Johnson say, “You’re stupid for coming in here.” Appellee’s App. at 60.
Carpenter also testified that Johnson hit him in the left jaw, causing him to fall,
and kicked him in the left eye. Id. at 61. In addition, Carpenter testified that a
couple months prior to the Incident, Johnson threatened to hurt him because
Johnson was upset that Carpenter was dating Johnson’s ex-girlfriend. Id. at 63-
64. A jury found Johnson guilty as charged. Johnson appealed, and this Court
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affirmed his conviction. Johnson v. State, No. 33A01-1306-CR-266 (Ind. Ct.
App. Dec. 31, 2013), trans. denied (2014).
[3] In August 2013, Carpenter filed a verified complaint against Lovell’s Lounge
and Johnson based on the Incident. The complaint’s “Facts” section contained
the following allegation: “Within moments of entering [the] Lounge, Carpenter
was brutally attacked by [Johnson] with numerous punches and kicks.”
Appellants’ App. at 41. In the “Parties and Jurisdiction” section, the complaint
alleged that “Johnson [was] an employee of and/or performed services for
Lovell’s Lounge.” Id. at 40.
[4] Carpenter’s complaint included three counts. In Count I, a claim for civil
assault and battery, Carpenter alleged that “Johnson did effectuate a civil
assault and battery upon [him],” and “intended to cause a harmful or offensive
contact with [him],” which caused severe bodily injury to him. Id. at 42. In
Count II, a negligence claim based on premises liability, Carpenter alleged that
he was an invitee and that Lovell’s Lounge breached its duty to him by failing
to protect him from “expected criminal acts,” failing to “prevent a reasonably
foreseeable attack by [Johnson],” and “failing to manage the [Lounge] in a
manner that took previously known threats or acts of violence into
consideration of the safety of patrons, including Carpenter.” Id. at 43. In
Count III, a claim based on a Dram Shop Act violation, Carpenter alleged that
Lovell’s Lounge furnished Johnson with alcohol when Johnson was visibly
intoxicated and Johnson’s intoxication was a proximate cause of Carpenter’s
injury and damages. Id.
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[5] Lovell’s Lounge was insured by CSU under a commercial general liability
policy (“the Policy”) and sought insurance coverage from CSU for Carpenter’s
complaint. However, in October 2013, CSU denied coverage to Lovell’s
Lounge on several grounds, including that the Policy contained an exclusion for
assault and battery.
[6] In July 2014, Carpenter filed a verified amended complaint against Lovell’s
Lounge and Johnson. The amended complaint was identical to the first
complaint except for four paragraphs added to the end of Count III, which
contained the following allegations:
38. Johnson owed Carpenter a duty not to cause harm to the
person or property of Carpenter.
39. On or about May 12, 2012, Johnson negligently breached the
duty of care by coming into physical contact with Carpenter at
which time Johnson accidently caused bodily injury to
Carpenter.
40. As a proximate result of Johnson’s negligence Carpenter
sustained injuries … .
41. Lovell’s Lounge owed Carpenter, an invitee, a duty to
protect him from foreseeable negligent harm, and/or [] to warn
of foreseeable harm. Lovell’s Lounge breached that duty.
Id. at 51.
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[7] Lovell’s Lounge sought insurance coverage from CSU based on Carpenter’s
amended complaint. In a letter dated August 4, 2014, CSU again denied
coverage based on the Policy’s exclusion for assault and battery.
[8] On November 14, 2014, attorney Mark A. Matthes filed an appearance for
Carpenter. At that time, Lovell’s Lounge was represented by attorney Robert
Emmerson. Matthes and Emmerson attempted to negotiate a consent
judgment between Carpenter and Lovell’s Lounge. On December 17, 2014,
Emmerson sent Matthes the following email:
I would kindly request until Jan. 9th for Lovell’s Lounge to file
an answer. I am trying to get a final answer from Jeremy
regarding his intentions, but I cannot sign the proposed consent
judgment as drafted. As we have discussed, I do not believe my
ethical obligations to the court would allow me to sign a
judgment which states that Jerry Johnson was an agent of
Lovell’s Lounge at the time of the incident.
Id. at 288.
[9] On December 31, 2014, Emmerson withdrew his appearance on behalf of
Lovell’s Lounge. During his deposition, Jeremy testified that Emmerson
withdrew because Emmerson had charged him $7000 for legal fees and Lovell
“told [Emmerson] I wasn’t gonna pay him.” Id. at 215.
[10] On February 25, 2015, Carpenter and Lovell’s Lounge submitted their Consent
Judgment to the trial court, which the court approved and entered. The
Consent Judgment provided in relevant part as follows:
Court of Appeals of Indiana | Opinion 33A01-1602-CT-265 | September 8, 2016 Page 6 of 26
2. Upon entering Lovell’s Lounge, [Johnson] negligently came
into physical contact with Carpenter, accidently causing him
serious bodily injury. The harm was neither intended nor
expected from the standpoint of Johnson or Lovell’s Lounge.
….
6. Carpenter was a business invitee, and as such, Lovell’s
Lounge owed a duty of reasonable care, including the duty to
warn Carpenter of foreseeable negligent conduct that could cause
harm.
7. The negligent conduct engaged in by Johnson which caused
the harm to Carpenter was foreseeable to Lovell’s Lounge,
however, while foreseeable to Lovell’s Lounge, it was neither
intended nor expected from the standpoint of Lovell’s Lounge or
its employees, including Carpenter.
8. Lovell’s Lounge breached its duty to warn Carpenter of the
foreseeable danger, which breach was also a proximate cause of
the harms of Carpenter.
9. Not only did Lovell’s Lounge breach its duty to warn,
[Johnson] performed services for and was an agent of Lovell’s
Lounge, and he was within the scope of his agency at the time of
the negligent conduct which was the harm to Carpenter.
10. Based on the foregoing, and to avoid the costs and expense
of litigation Defendant Lovell’s Lounge agrees that [Carpenter]
has incurred injuries and damages, including pain and suffering,
totaling $1,125,000.
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Id. at 54-56. The Consent Judgment was signed by Jeremy Lovell, pro se, as
the agent of Lovell’s Lounge and by Matthes, as attorney for Carpenter. Jeremy
was not a licensed attorney. Johnson was not a party to the Consent Judgment.
On March 17, 2015, Johnson was dismissed from the case.
[11] In addition to the Consent Judgment, Carpenter, Lovell’s Lounge, and Jeremy
entered into a postjudgment agreement not to execute, in which Carpenter, in
consideration for the Consent Judgment, agreed not to execute or enforce the
Consent Judgment against Lovell’s Lounge, to indemnify and defend Lovell’s
Lounge from any action that CSU might have against Lovell’s Lounge for its
execution of the Consent Judgment, and to pay Jeremy the first $7000 of any
recovery by Carpenter against CSU.
[12] On March 17, 2015, Carpenter filed a motion for proceedings supplemental,
asserting that the Policy provided coverage for the Consent Judgment and
asking the trial court to order CSU to appear to answer to its obligations under
the Policy. On March 23, 2015, Matthes, who was still representing Carpenter,
filed an appearance on behalf of Lovell’s Lounge. CSU filed an answer.
[13] On June 19, 2015, CSU filed a complaint seeking a declaratory judgment in
cause number 33C01-1506-PL-45, naming as defendants Lovell’s Lounge,
Jeremy Lovell d/b/a Lovell’s Lounge, and Carpenter. CSU asserted that it had
no obligation under the Policy to make payment to Carpenter for the Consent
Judgment because Carpenter’s injuries were caused by assault and battery and
the Policy contained an exclusion for assault or battery. CSU also asserted that
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the Consent Judgment had been obtained by fraud, bad faith, or collusion; it
had been procured by the unauthorized practice of law; it did not fall within a
broad range of reasonable solutions of the underlying dispute; and it contained
statements of fact and/or law that were not necessarily adjudicated and
therefore were unenforceable against CSU. Id. at 69-73. On June 24, 2015, the
declaratory judgment action was consolidated with the proceeding
supplemental.
[14] On July 9, 2015, Matthes filed an appearance on behalf of Jeremy Lovell d/b/a
Lovell’s Lounge. In August 2015, Carpenter, Lovell’s Lounge, and Jeremy
filed a motion to dismiss CSU’s complaint for declaratory judgment and a
supporting brief, asserting that CSU’s complaint failed to state a claim because
CSU was barred by collateral estoppel from relitigating facts and issues
determined in the Consent Judgment. Id. at 78-110. In September 2015,
Lovell’s Lounge and Jeremy filed a counterclaim against CSU, alleging that
CSU breached the Policy by failing to defend and/or indemnify Lovell’s
Lounge for Carpenter’s lawsuit against it.
[15] In October 2015, CSU filed a motion to set aside the Consent Judgment, a
cross-motion for summary judgment, and a memorandum in opposition to
Carpenter, Lovell’s Lounge, and Jeremy’s motion to dismiss and in support of
its cross-motion for summary judgment, arguing, among other things, that the
Consent Judgment was the product of bad faith or collusion and therefore was
not binding on CSU. In November 2015, Carpenter, Lovell’s Lounge, and
Jeremy filed a cross-motion for partial summary judgment on CSU’s complaint
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for declaratory judgment, arguing that because CSU failed to file a timely
declaratory judgment action, it was barred from challenging the Consent
Judgment. Id. at 290. In December 2015, the trial court held a hearing on the
motion to dismiss CSU’s complaint, the motion to set aside the Consent
Judgment, and the cross-motions for summary judgment.
[16] In January 2016, the trial court issued findings of fact, conclusions thereon, and
order of judgment, finding in relevant part that the Consent Judgment was
procured by bad faith and/or collusion, and therefore the doctrine of collateral
estoppel did not apply to bind CSU to the Consent Judgment. Specifically, the
trial court found as follows:
Under Indiana law, a consent judgment will not bind an insurer
if the consent judgment was the product of bad faith or collusion.
Midwestern Indem. Co. v. Laikin, [119 F. Supp. 2d 831, 843 (S.D.
Ind. 2000)].
….
The Court finds that [Carpenter, Lovell’s Lounge, and Jeremy]
do not enter these proceedings with clean hands. Carpenter and
Lovell clearly operated with “furtive design”–and without any
concern for the actual facts–in trying to construct a Consent
Judgment that would fall within CSU’s coverage and thereby
allow them to jointly profit. There is clearly no “good ground to
support” the Consent Judgment under the actual facts presented
at the criminal trial or applicable law. The Consent Judgment is
clearly “unreasonable and groundless” when viewed in relation
to the actual facts of what happened in the Incident. Its
procurement obviously involved misrepresentation, lack of
serious negotiations on damages, attempts to affect CSU’s
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insurance coverage, [and] profit to both Carpenter and Lovell.
Most troubling to the court is a written promise that Carpenter
would pay [Jeremy] the first $7,000.00 of any recovery against
CSU for the consent judgment. Thus, the Court finds that the
Consent Judgment was presented in bad faith and procured
through collusion.
Id. at 32-33.
[17] The trial court concluded that CSU had no obligation under the Policy to make
payment to Carpenter for the Consent Judgment or for the Incident between
Johnson and Carpenter. The trial court denied Carpenter, Lovell’s Lounge,
and Jeremy’s motion to dismiss CSU’s complaint and their cross-motion for
partial summary judgment. Also, the trial court granted CSU’s motion to set
aside the Consent Judgment and its cross-motion for summary judgment and
directed final judgment in favor of CSU on its declaratory judgment action.
Finally, the trial court dismissed Lovell’s Lounge and Jeremy’s counterclaim
and denied Carpenter’s motion for proceedings supplemental as moot. This
appeal ensued.
Discussion and Decision
[18] Appellants argue that the trial court erred in granting CSU’s summary
judgment motion and denying theirs. Our standard of review is well settled:
When reviewing the grant or denial of summary judgment, this
Court applies the same legal standard as a trial court: summary
judgment is appropriate where no designated genuine issues of
material fact exist and the moving party is entitled to judgment as
a matter of law. The standard of review is not altered by cross
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motions for summary judgment on the same issues. A party
appealing the denial of summary judgment carries the burden of
persuading this Court that the trial court’s decision was
erroneous. Moreover, when the material facts are not in dispute,
our review is limited to determining whether the trial court
correctly applied the law to the undisputed facts; and, if the issue
presented is purely a question of law, we review the matter de
novo. In addition, our standard of review is not changed by the
trial court’s entry of findings of fact and conclusions thereon.
Although the findings and conclusions provide valuable insight
into the trial court’s decision, they are not binding upon this
Court.
C.M.L. ex rel. Brabant v. Republic Servs., Inc., 800 N.E.2d 200, 202 (Ind. Ct. App.
2003) (citations omitted), trans. denied (2004). 1 “[W]e will affirm a summary
judgment order if it is sustainable upon any theory or basis found in the
record.” E.J. ex rel. Jeffrey v. Okolocha, 972 N.E.2d 941, 945 (Ind. Ct. App.
2012).
[19] Appellants challenge the trial court’s finding that collateral estoppel does not
apply to bind CSU to the Consent Judgment.
Collateral estoppel, also referred to as “issue preclusion,”
describes the binding effect of a previous judgment regarding a
particular issue on the parties and their privies in a subsequent
action. Liberty Mut. Ins. Co. v. Metzler, 586 N.E.2d 897, 900 (Ind.
Ct. App. 1992) [, trans. denied (1993)]. “The doctrine of collateral
1
We note that other than briefly mentioning that the court on appeal must consider each cross-motion for
summary judgment separately, Appellants fail to set forth the standard of review in their brief as required by
Indiana Appellate Rule 46(A)(8)(b). In addition, the table of contents of Appellants’ brief fails to include the
subheadings of their thirty-five-page argument section and the page on which they begin as required by
Indiana Appellate Rule 46(A)(1).
Court of Appeals of Indiana | Opinion 33A01-1602-CT-265 | September 8, 2016 Page 12 of 26
estoppel applies to insurance contracts and an insurer is
ordinarily bound by the result of litigation to which its insured is
a party, so long as the insurer had notice and opportunity to
control the proceedings.” Id. An insurer may avoid the effects of
collateral estoppel by: (1) defending the insured under a
reservation of rights in the underlying tort action, or (2) filing a
declaratory judgment action for a judicial determination of its
obligations under the policy. Id. at 902 (citing State Farm Mut.
Auto. Ins. Co. v. Glasgow, 478 N.E.2d 918 (Ind. Ct. App. 1985)).
Either of these actions will preserve an insurer’s right to later
challenge a determination made in the prior action. An insurer
may also elect not to defend an insured party in a lawsuit if, after
investigation of the complaint, the insurer concludes that the
claim is “patently outside the risks covered by the policy.” Id. at
901 (citations omitted). Such a course is taken at the insurer’s
peril because the insurer will be bound at least to the matters
necessarily determined in the lawsuit. Frankenmuth Mut. Ins. Co.
v. Williams, 645 N.E.2d 605, 608 (Ind. 1995) (citation omitted)
(emphasis added).
State Farm Fire & Cas. Co. v. T.B. ex rel. Bruce, 762 N.E.2d 1227, 1230-31 (Ind.
2002).
[20] Specifically, Appellants assert that collateral estoppel applies to bar CSU from
relitigating the facts and issues determined in the Consent Judgment because
CSU failed to defend Lovell’s Lounge under a reservation of rights or file a
declaratory judgment action prior to the trial court’s approval of the Consent
Judgment. They contend that this case “falls squarely under the [Metzler, 586
N.E.2d 897, and Frankenmuth Mut. Ins. Co. v. Williams, 690 N.E.2d 675 (Ind.
1997) (“Frankenmuth II”)] line of cases.” Appellants’ Br. at 31. We disagree.
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[21] In Metzler, the insured’s truck driver got into an argument and drove his semi-
tractor into a pub, killing one person and injuring many others. The truck
driver was convicted of various counts of murder, attempted murder, battery,
and operating while intoxicated. “On appeal, [he] claimed the evidence did not
show he was acting with the requisite intent to commit the crimes charged. Our
supreme court rejected [his] argument, affirmed the convictions, and indicated
the evidence showed [he] intended the consequences of his act.” 586 N.E.2d at
899. The injured parties sued the driver, alleging that their injuries were caused
by his negligence. The driver was served with a complaint and summons but
did not respond. The insurer also had notice of the lawsuit but did nothing. A
default judgment was entered against the driver. The injured parties brought
proceedings supplemental naming the insurer as garnishee defendant. The
insurer brought a counterclaim seeking a declaratory judgment that the
insurance policy did not cover the driver’s conduct. The trial court granted the
injured parties’ summary judgment motion, finding that they were entitled to
recover from the insurer the amount of their judgment against the truck driver.
[22] On appeal, the insurer contended that collateral estoppel did not apply to bind it
to the underlying tort judgment because it had the right not to defend or
intervene in the underlying lawsuit once its own independent investigation
revealed that there was no coverage under the insurance policy. Id. at 900. The
Metzler court acknowledged that the insurer had a right not to defend, but
rejected the notion that the insurer’s right not to defend would operate to
preclude the application of collateral estoppel, stating “it is clear that an insurer
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may refuse to defend its insured, but at its own peril.” Id. at 901. The Metzler
court also observed,
An insurer, having knowledge its insured has been sued, may not
close its eyes to the underlying litigation, force the insured to face
the risk of that litigation without the benefit of knowing whether
the insurer intends to defend or to deny coverage, and then raise
policy defenses for the first time after judgment has been entered
against the insured.
Id. at 902. The Metzler court concluded that the insurer was collaterally
estopped from challenging whether the truck driver acted negligently or
intentionally in causing the injured parties’ damages. Id.[23] In Frankenmuth II, a wife was babysitting a child in her home, and her husband
molested the child. Child and her mother sued husband and wife, the holders
of a homeowner’s insurance policy. Their lawsuit included a negligence claim
against the wife for her alleged negligence in supervising the child. The insurer
investigated the claim and concluded that because husband’s conduct was
intentional, the tort claim was not covered by the insurance policy. The insurer
neither defended husband and wife under a reservation of rights nor filed a
declaratory judgment action. The wife entered into a consent judgment without
the insurer’s knowledge or consent, in which she admitted that she had been
negligent and that her negligence was the proximate cause of the child’s
injuries. The child and her mother then initiated proceedings supplemental to
recover the judgment from the insurer. The insurer moved for summary
judgment, arguing that the insurance policy did not provide coverage for the
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consent judgment because the injuries to the child resulted from an intentional
act. The trial court denied the insurer’s summary judgment motion on the basis
that the insurer was collaterally estopped from opposing the action to recover
the judgment because it had declined to defend its insured. 690 N.E.2d at 677.
[24] The insurer appealed, again arguing that the insurance policy did not cover the
child’s injuries because they resulted from an intentional act. The Frankenmuth
II court stated that the insurer was attempting to conflate husband’s conduct
with that of the wife in order to bring the consent judgment within the policy’s
intentional act exclusion, and that the insurer’s argument was fundamentally
flawed because the lawsuit had never alleged that wife had engaged in any
intentional conduct that caused the child’s injuries. Id. at 678. The court noted
that the insurer had neither defended the insured under a reservation of rights
nor brought a declaratory judgment action to clarify its obligation under the
insurance policy. Id. at 679. The court explained, “[A]n insurer may ‘refuse to
defend or clarify its obligation by means of a declaratory judgment action,’ but
‘it does so at its peril.’” Id. (quoting Metzler, 586 N.E.2d at 902). The court
declared that the insurer was “now estopped from complaining that all of [the
child’s] damages flowed from the intentional act of molestation, rather than [the
wife’s] own negligence.” Id. at 678.
[25] Metzler and Frankenmuth II are distinguishable because neither case involved the
issue raised here: namely, whether collateral estoppel operates to bind the
insurer to a consent judgment where the consent judgment was procured by bad
faith and/or collusion. Metzler did not even involve a consent judgment.
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Accordingly, we are unpersuaded by Appellants’ contention that Metzler and
Frankenmuth II dictate that collateral estoppel applies here.
[26] Although it is not dispositive, we find some guidance for the resolution of this
case in Laikin, 119 F. Supp. 2d 831, 2 which the trial court relied on. In Laikin,
renters were injured by a fire in a mobile home and sued the owners in Marion
Superior Court. The owners demanded that their insurer indemnify and defend
them in the law suit. The insurer denied coverage and filed a declaratory
judgment action in federal court seeking a declaration that it owed no duty to
indemnify or defend the owners. Meanwhile, in state court, the owners and the
renters entered into a settlement agreement, which was approved by the state
court.
[27] Then, in the declaratory judgment action, the insurer filed a summary judgment
motion arguing, among other things, that it had no duty to pay the agreed
judgment because it was procured by fraud, collusion or bad faith. Before
reviewing the insurer’s claim, the Laikin court explained that its review of the
issue was based on the assumption that the insurer had breached its contract by
refusing to provide a defense and indemnity for the losses arising from the fire.
Because Indiana law controlled the parties’ claims and defenses, and the
Indiana Supreme Court had not directly addressed the issue, the Laikin court
2
Another panel of this Court adopted Laikin’s reasoning in the context of deciding that the trial court erred in
permitting the insurer to intervene in its own name for purposes of appealing the judgment against its
insured. Cincinnati Ins. Co. v. Young, 852 N.E.2d 8, 14 (Ind. Ct. App. 2006), trans. denied (2007).
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began its analysis by reviewing Indiana cases that dealt with collateral estoppel
to predict how our supreme court would resolve the issue. After discussing
Frankenmuth II and Metzler, the court went on to consider the Restatement
(Second) of Judgments and cases from Minnesota, Arizona, and Texas that had
dealt with allegations that a consent judgment had been procured by bad faith
and/or collusion. Id. at 836-42. From this broad swath, the Laikin court
concluded that
Indiana courts would adopt an approach to this case in which the
consent judgment with a covenant not to execute would bind the
insurer on issues of its insured’s liability and the extent of the
injured parties’ damages, so long as (1) the coverage is eventually
shown, and so long as the consent judgment (2) is not the
product of bad faith or collusion and (3) falls somewhere within a
broad range of reasonable resolutions of the underlying dispute.
Id. at 842.
[28] As for the burdens of production and proof on the issues of bad faith, collusion,
and reasonableness, the Laikin court discussed two different approaches. In one
approach, the claimant has the burden of showing by a preponderance of the
evidence that the amount of the judgment was reasonable and prudent. Id. at
841. In the second approach, the insured has the initial burden of producing
evidence that the settlement is “‘prima facie reasonable in amount and
untainted by bad faith,’” and if this burden is satisfied, then the insurer has
“‘the burden of demonstrating by a preponderance of the evidence that it is not
liable because the settlement is neither reasonable nor reached in good faith.’”
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Id. at 841 (quoting Griggs v. Bertram, 443 A.2d 163, 173-74 (N.J. 1982)).
However, the Laikin court did not need to predict precisely which approach
Indiana would take because the results in the case would have been the same
under either approach. Id. at 842.
[29] The insurer argued that the terms of the consent judgment were so
unreasonable and the settlement amount of $1.6 million was so unreasonably
excessive that the consent judgment must have been the result of bad faith or
collusion. The Laikin court noted that the insurer had presented no direct
evidence of bad faith or collusion, and ultimately concluded as a matter of law
that the terms of the consent judgment and the amount of the settlement were
not unreasonable and could not reasonably permit an inference of collusion or
bad faith. Id. at 850.
[30] Here, Appellants claim that Laikin applies only where an insurer files a
declaratory judgment action prior to the court’s approval of a consent
judgment. They contend that the Laikin court “explained” that because the
insurer had filed a declaratory judgment action, Frankenmuth II and Metzler “did
not control.” Appellants’ Br. at 31 (citing 119 F. Supp. 2d at 837). Although
the Laikin court recognized differences between its case and Frankenmuth II and
Metzler, including that the insurers in those cases did not file declaratory
judgment actions, we are not persuaded that, even if the insurer in Laikin had
failed to file a declaratory judgment action, the Laikin court would have
concluded that Frankenmuth II and Metzler controlled whether the consent
judgment would bind the insurer because those cases did not involve allegations
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of bad faith or collusion. 3 In any event, we have already concluded that
Frankenmuth II and Metzler are not dispositive of this case.
[31] Furthermore, Appellants’ application of Laikin could result in substantial
injustice because it would mean that even if a consent judgment is procured by
bad faith or collusion, the insurer is bound by it unless the insurer had defended
the insured under a reservation of rights in the underlying tort action or filed a
declaratory judgment action prior to the approval of the consent judgment.
Appellants have not offered, nor can we discern, any sensible, equitable
justification to bar an insurer from challenging a consent judgment where it was
obtained by bad faith and/or collusion even if the insurer did not file a
declaratory judgment action prior to the consent judgment. Appellants’
3
Appellants also assert that this Court has “expressly limited Laikin’s applicability to where a declaratory
judgment action had been timely filed.” Appellant’s Br. at 33 (citing Klepper v. ACE American Ins. Co., 999
N.E.2d 86, 93 (Ind. Ct. App. 2014), trans. denied). Appellants’ characterization of Klepper is overbroad, and
the quote they provide from Klepper is out of context and incomplete. In Klepper, the insurer had agreed to
defend its insured under a reservation of rights, and had spent considerable resources doing so before the
insured entered into a settlement agreement with the plaintiffs without the insurer’s consent. The settlement
agreement provided that a certain amount was to be collected from the insurer “to the extent the damages fall
within the scope” of the policy. 999. N.E.2d at 89. On appeal, the Klepper court was asked to consider
whether the insurance company could rely on the insurance policy’s provisions (1) requiring its insured not to
make a “voluntary payment” without the insurer’s consent and (2) limiting the insurer’s payment under the
policy to those sums that the insured became “legally obligated to pay” and whether those provisions
precluded coverage under the policy. Id. at 90-98. In addressing these issues, the Klepper court reviewed
Indiana cases, including the adoption of Laikin’s reasoning in Young, 852 N.E.2d at 14. Notably, the
significance of Laikin to Klepper was the second issue in Laikin, which we have not discussed because it is
irrelevant to this case. The second issue in Laikin was whether the insurer could rely on the insurance
policy’s “legally obligated to pay” language and thereby avoid any duty to pay the consent judgment because
the settlement agreement did not impose any legal obligation on the insured to satisfy the judgment. The
quote in Appellants’ brief is taken from Klepper’s description of Young’s adoption of Laikin, and is mere dicta.
In any event, the Klepper court distinguished Laikin because Laikin “was premised on the assumption that the
insurer had breached the insurance contract.” Id. at 95. In Klepper, the parties vigorously disputed whether
the insurer had breached the contract. The Klepper court concluded that the “voluntary payment” and
“legally obligated to pay” provisions precluded coverage, and therefore the insurer was not bound by the
settlement agreement. Id. at 99.
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position would actually encourage insureds to engage in collusion if it was clear
that no coverage was available and the insurer had not done anything to protect
its interests. We agree with CSU’s observation that insurers would always have
to file pre-emptive declaratory judgment actions in case the insured might later
enter into a collusive consent judgment. Therefore, we conclude that even
though CSU did not defend Lovell’s Lounge under a reservation of rights or file
a declaratory judgment action before the Consent Judgment was approved, if
the Consent Judgment is the product of bad faith or collusion, it will not bind
CSU.
[32] Indiana courts have not addressed what constitutes bad faith or collusion in the
context of an insured’s procurement of a consent judgment. In considering
whether an insurer has acted in bad faith in denying an insured’s claim, we
have said that a “‘finding of bad faith requires evidence of a state of mind
reflecting dishonest purpose, moral obliquity, furtive design, or ill will.’” Missler
v. State Farm Ins. Co., 41 N.E.3d 297, 302 (Ind. Ct. App. 2015) (quoting Mahan
v. Am. Standard Ins. Co., 862 N.E.2d 669, 677 (Ind. Ct. App. 2007), trans. denied).
“To prove [an insurer’s] bad faith [in denying a claim], the plaintiff must
establish by clear and convincing evidence that the insurer had knowledge that
there was no legitimate basis for denying liability.” Id. Here, CSU is claiming
that the Consent Judgment was the product of bad faith or collusion, and
therefore we conclude that it has the burden to prove by clear and convincing
evidence that the Consent Judgment was procured by bad faith or collusion. In
this respect, we decline to adopt for this case either of the two approaches to the
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production and burden of proof discussed in Laikin. Our decision to place the
burden of proof wholly on CSU reflects the fact that CSU did not file its
declaratory judgment action before the Consent Judgment was approved.
[33] The Tenth Circuit Court of Appeals has also addressed whether a consent
judgment was procured by collusion, and that case provides some helpful
direction:
Any negotiated settlement involves cooperation to a degree. It
becomes collusive when the purpose is to injure the interests of
an absent or nonparticipating party, such as an insurer or
nonsettling defendant. Among the indicators of bad faith and
collusion are unreasonableness, misrepresentation, concealment,
secretiveness, lack of serious negotiations on damages, attempts
to affect the insurance coverage, profit to the insured, and
attempts to harm the interest of the insurer. They have in
common unfairness to the insurer, which is probably the bottom
line in cases in which collusion is found.
Cont’l Cas. Co. v. Hempel, 4 F. App’x 703, 717 (10th Cir. 2001) (quoting Pruyn v.
Agric. Ins. Co., 42 Cal. Rptr. 2d 295, 305 (Cal. Ct. App. 1995)).
[34] We note that not all the considerations described in Hempel necessarily need to
be found in every case of bad faith or collusion, and there may be other
considerations not recognized in Hempel, but it is a good starting point for
determining whether the Consent Judgment here was procured by bad faith or
collusion. As for reasonableness, the Tenth Circuit considered “‘what a
reasonable prudent person in the position of [the policyholder] would have
settled for on the merits of plaintiff’s claim.’” Id. (quoting Miller v. Shugart, 316
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N.W.2d 729, 735 (Minn. 1982)). Notably, the issues of bad faith or collusion
are closely related to the issue of reasonableness of settlement amount, and the
evidence often overlaps. Laikin, 119 F. Supp. 2d at 843.
[35] Turning now to the specific circumstances present here, we have no difficulty in
concluding that there is clear and convincing evidence that the Consent
Judgment was obtained in bad faith or collusion. The Consent Judgment
stipulates that Johnson “negligently came into physical contact with Carpenter,
accidently causing him serious bodily injury.” Appellants’ App. at 54. This is
patently unreasonable in light of all the available evidence and the allegations in
the verified amended complaint that Johnson “brutally attacked” Carpenter
“with numerous punches and kicks.” Id. at 48. Carpenter has testified
repeatedly that Johnson punched him and kicked him. There is no evidence
that would support a reasonable inference that Johnson accidently punched and
kicked Carpenter. Rather, all the evidence indicates that Johnson intentionally
punched and kicked Carpenter.
[36] In addition, the Consent Judgment stipulates that Johnson “performed services
for and was an agent of Lovell’s Lounge” and “was within the scope of his
agency at the time of the negligent conduct which was the harm to Carpenter.”
Id. at 56. This stipulation is particularly troubling because the amended
complaint did not include any allegations regarding an agency relationship
between Lovell’s Lounge and Johnson. Although Jeremy testified that Johnson
occasionally performed repairs for the Lounge in exchange for free beer, their
relationship does not remotely appear to be one of principal/agent. There is no
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evidence that Johnson had an agreement with Lovell’s Lounge to perform
services or to represent Lovell’s Lounge in any respect. In addition, there is
absolutely no evidence that he was performing any services for the Lounge at
the time of the Incident. 4 We conclude that there is no rational basis from
which one could reasonably infer that Johnson was an agent of Lovell’s Lounge
or that he was acting within the scope of his agency at the time of the Incident.
[37] As for whether Lovell’s Lounge and Carpenter engaged in serious negotiations
to reach a reasonable settlement, we conclude that the evidence clearly supports
the contrary. Appellants claim that approximately seven months elapsed
between July 2014, when the amended complaint was filed, and February 2015,
when the Consent Judgment was executed, which does not support a finding
that the parties failed to engage in serious negotiations. However, the record
shows that the parties were not involved in negotiations until after CSU denied
coverage the second time in August 2014. Matthes did not appear for
Carpenter until November 14, 2014. In December 2014, the attorney for
4
Vicarious liability “is a legal fiction by which a court can hold a party legally responsible for the negligence
of another, not because the party did anything wrong but rather because of the party’s relationship to the
wrongdoer.” Sword v. NKC Hosps., Inc., 714 N.E.2d 142, 147 (Ind. 1999). Vicarious liability may be imposed
through various legal doctrines, including respondeat superior, apparent or ostensible agency, agency by
estoppel, and the nondelegable duty doctrine. Id. “Apparent agency is a doctrine based in agency law.” Id.
at 148. “[F]or the liability of an agent to be imputed to a principal, an agency relationship must exist, and an
essential element of that relationship is that the agent must ‘act on the principal’s behalf;’ the agent must
consent to act on the principal’s behalf, as well as be subject to the principal’s control.” Smith v. Delta Tau
Delta, Inc., 9 N.E.3d 154, 164 (Ind. 2014) (quoting Restatement (Third) of Agency § 1.01 (2006)).
Respondeat superior is a tort theory of vicarious liability. Sword, 714 N.E.2d at 148. “Under respondeat
superior, an employer, who is not liable because of his own acts, can be held liable ‘for the wrongful acts of
his employee which are committed within the scope of employment.’” Id. (quoting Stropes v. Heritage House
Childrens Ctr., 547 N.E.2d 244, 247 (Ind. 1989)).
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Lovell’s Lounge withdrew his appearance immediately following his email to
Carpenter’s attorney, in which he explained that he could not honor his ethical
obligations and stipulate that Johnson was an agent of Lovell’s Lounge and was
acting within the scope of his agency at the time of the Incident. Also, despite
the requirement that a corporation be represented by counsel in all cases,
Lovell’s Lounge did not obtain new counsel, and Jeremy, who is not authorized
to practice law in the State of Indiana, signed the Consent Judgment. 5 See Ind.
Code § 34-9-1-1 (providing that “a corporation and any organization required to
make application to the secretary of state under IC 25-11-1-3 must appear by
attorney in all cases.”). Less than a month later, Carpenter’s attorney filed an
appearance on behalf of Lovell’s Lounge. 6 These circumstances show not only
that Lovell’s Lounge was not seriously negotiating with Carpenter, but also that
they were trying to affect coverage by purposely remaking the Incident so that it
would not fall under the Policy’s assault and battery exclusion.
[38] Because there is clear and convincing evidence that the Consent Judgment was
obtained by bad faith or collusion, we conclude that collateral estoppel does not
apply and therefore CSU is not bound by the Consent Judgment. 7 Accordingly,
5
The trial court would have been within its authority to withhold approval of the Consent Judgment based
on Lovell’s Lounge’s lack of legal representation.
6
Appellants wrongly claim that attorney Matthes did not appear for Lovell’s Lounge until after CSU filed its
declaratory judgment action. Appellants’ Br. at 36. Matthes appeared for Lovell’s Lounge on March 23,
2015, one week after Carpenter filed his motion for proceedings supplemental. Appellants’ App. at 6.
Matthes appeared for Jeremy Lovell d/b/a/ Lovell’s Lounge on July 9, 2015. Id. at 8.
7
Because of our resolution of this issue, we need not address CSU’s claim that the Consent Judgment is void
because it was obtained by the unauthorized practice of law.
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we affirm the trial court’s grant of CSU’s summary judgment motion, its denial
of Appellants’ cross-motion for summary judgment, and judgment in favor of
CSU on its declaratory judgment action.
[39] Affirmed.
Najam, J., and Robb, J., concur.
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