Tidyman's Management Services Inc. v. National Union Fire Insurance

JUSTICE COTTER

delivered the Opinion of the Court.

¶1 In Tidyman’s Management Services v. Davis (Tidyman’s I), 2014 MT 205, 376 Mont. 80, 330 P.3d 1139, we affirmed the District Court’s finding that National Union Fire Insurance (NUFI) breached its duty to defend its insureds, Davis and Maxwell, but we reversed the District Court’s approval of a stipulated settlement between Davis and Maxwell and Plaintiffs for $29 million. We remanded for a hearing on the reasonableness of the settlement amount. The District Court conducted a reasonableness hearing, and again approved the stipulated settlement. NUFI appeals. We remand for a second reasonableness hearing.

ISSUES

¶2 We restate the issues on appeal as follows:

¶3 Did the District Court err in using a “reliable evidence” test to assess the reasonableness of the stipulated judgment?

¶4 Did the District Court err by not deducting from the $29 million judgment the amount paid out to ESOP participants following Tidyman’s merger with SuperValu?

¶5 Did the District Court err in awarding prejudgment interest from January 4, 2013?

FACTUAL AND PROCEDURAL BACKGROUND

¶6 This is the second time this case has come before us. We set forth the underlying facts in Tidyman’s I, and we will not repeat them here. In Tidyman’s I, we affirmed the District Court’s finding that NUFI unjustifiably refused to defend its insured, Davis and Maxwell, and was therefore estopped from denying coverage. Tidyman’s I, ¶ 33. However, we reversed the District Court’s entry of summary judgment. to the extent it approved a stipulated judgment of $29 million, and remanded for the District Court to hold a hearing to assess the reasonableness of the settlement amount. Tidyman’s I, ¶ 44. On remand, we deferred to the District Court to set the parameters of the reasonableness hearing, and to determine whether and to what extent further discovery was warranted. Tidyman’s I, ¶ 44. We also instructed that the burden of establishing the unreasonableness of the stipulated judgment would rest with NUFI. Tidyman’s I, ¶ 44.

¶7 The District Court determined that additional but limited discovery was necessary prior to a hearing on reasonableness, so it opened discovery for the narrow purpose of obtaining information regarding the reasonableness of the underlying judgment. The District Court then held a reasonableness hearing on January 28-30, 2015. Following the hearing, the District Court concluded that “Maxwell and Davis were justified in settling for the amount of $29 million based [on] their knowledge of Plaintiffs’ claims and their exposure to financial ruin created by NUFI’s failure to defend.” The District Court therefore found that NUFI had not borne its burden to prove the stipulated judgment was unreasonable, and entered judgment against NUFI for $29 million. NUFI appeals.

STANDARD OF REVIEW

¶8 This Court reviews de novo issues of law, including a district court’s decision about which legal standard to apply in assessing the reasonableness of a stipulated judgment. Tidyman’s I, ¶ 13; see e.g. Seltzer v. Morton, 2007 MT 62, ¶ 152, 336 Mont. 225, 154 P.3d 561 (holding that we review de novo a district court’s application of certain “guideposts” in assessing whether a jury’s punitive damages verdict is “grossly excessive”). The decision to grant or deny prejudgment interest is also reviewed de novo. Tidyman’s I, ¶ 13.

DISCUSSION

f 9 Did the District Court err in using a “,reliable evidence” test to assess the reasonableness of the stipulated judgment?

¶10 In Tidyman’s I, we concluded that “further consideration is necessary to determine whether the 29 million dollar stipulated settlement is reasonable, in light of the questions NUFI has raised.” Tidyman’s I, ¶ 44. Among the questions raised by NUFI were whether the $29 million figure was unreasonable “because it was based only on unsworn opinions of experts whom plaintiffs retained and paid and who have never been cross-examined by [NUFI’s] counsel” (internal quotations omitted); because “no buyer had been identified at the price TMSI’s financial advisor, Zachary Scott, suggested the corporation might bring if sold to another chain — the figure on which the 29 million dollars is based”; because “the settlement amount is magnitudes greater than the amount for which the plaintiffs had settled with other directors and the amount the plaintiffs had offered Davis himself in settlement”; and because “the plaintiffs’ own numbers reveal that Zachary Scott opined that the value of the corporation as a standalone entity was 11 million dollars.” Tidyman’s I, f 42. With these questions in mind, we reversed the District Court’s entry of summary judgment to the extent it approved of the $29 million sum, and remanded for a hearing focused on the reasonableness of the settlement amount. Tidyman’s I, ¶ 44.

¶11 On remand, the District Court articulated its own subjective standard for assessing the reasonableness of the settlement amount:

To determine whether the stipulated settlement is within the range of reasonableness, the Court has considered reasonableness from the perspective of the insured at the time of the stipulation, whether the information relied upon possessed sufficient indicia of reliability and whether the damages represented might naturally have been expected to result from the breach of the duty to defend.

Over the course of a three day hearing, the District Court received evidence and testimony from Plaintiffs and NUFI. Although the District Court allowed testimony from NUFI’s expert that the stipulated settlement was not reasonable because it exceeded his assessment of the value of the company prior to the insurer’s breach of the duty to defend, the District Court found that this perspective “fail[ed] to account for the measure of damages for the breach of the duty to defend.” The District Court, citing State Farm Mut. Auto. Ins. Co. v. Freyer, 2013 MT 301, ¶ 35, 372 Mont. 191, 312 P.3d 403, concluded that “[w]here an insurer has left its insured on its own to challenge liability, the insurer should not be able to reach back and interject itself in a controversy it has sidestepped to void a deal the insured has entered into to eliminate personal liability.” Reasoning that NUFI had lost the right to litigate the merits of the underlying case, the court therefore largely precluded the parties from conducting discovery or introducing evidence on matters related to the merits of the case.

¶12 However, as NUFI argues on appeal, by failing to consider the merits and value of the underlying case in assessing the reasonableness of the settlement amount, the District Court failed to comply with our instructions on remand. Instead of considering the challenges to reasonableness raised by NUFI and highlighted in our opinion in Tidyman’s I, the District Court based its conclusion that the settlement was reasonable on its assessment that “[t]he materials relied up[on] by Plaintiffs and Maxwell and Davis possess sufficient indicia of reliability.” We have previously stated that “[t]he insurer, even when in breach of its obligations to its insured, is entitled to have the district court make a determination of the reasonableness of a settlement entered by the insured.” Abbey/Land LLC v. Interstate Mechanical, Inc., 2015 MT 77, ¶ 12, 378 Mont. 372, 345 P.3d 1032 (citing Tidyman’s I, ¶ 41). The District Court did not actually assess the reasonableness of the settlement in this case, but rather sought to determine whether the $29 million amount had some grounding in reliable evidence from the perspective of Davis and Maxwell. We therefore remand this case for a second hearing on the reasonableness of the stipulated settlement. On remand, the District Court shall assess reasonableness using the standard set forth below.

¶13 NUFI and amicus curiae Montana Defense Trial Lawyers urge this Court to announce a requirement that “the settlement amount be analyzed from the perspective of the objective merits of the case and not from the subjective perspective of whether the insured was justified in accepting a release of liability in exchange for whatever the plaintiff requested” (emphasis in original). In support of this approach, NUFI cites cases from several of our sister states that analyze the merits of the underlying case, the plaintiffs theory of liability and damages, the strength of available defenses, and the risks and expenses to both parties of continued litigation in order to determine the reasonableness of a stipulated settlement amount. See e.g. Bird v. Best Plumbing Grp., LLC, 287 P.3d 551, 556 (Wash. 2012); Great Divide Ins. Co. v. Carpenter, 79 P.3d 599, 613 (Alaska 2003); Himes v. Safeway Ins. Co., 66 P.3d 74, 85 (Ariz. Ct. App. 2003); Associated Wholesale Grocers v. Americold Corp., 934 P.2d 65, 87 (Kan. 1997). However, none of the cases cited by NUFI involved an insurer’s breach of the duty to defend its insured. NUFI is untroubled by this dissimilarity; according to NUFI, the fact that an insurer breached its duty to defend its insured is not relevant to an assessment of the value of the underlying case.

¶14 All parties agree that a reasonableness hearing should be conducted objectively from the point of view of a prudent person in the position of the insured defendant. See e.g. Miller v. Shugart, 316 N.W.2d 729, 735 (Minn. 1982). But as Plaintiffs and amicus curiae Montana Trial Lawyers Association point out, in a case in which there has been a breach of the duty to defend, such a defendant is no longer an insured defendant and is faced with personal responsibility for a potentially very large sum. We agree with Plaintiffs that a breach of the duty to defend is a factor that a prudent person in the position of the defendant would consider when determining what settlement amount is acceptable to him or her. In other words, an objective standard of reasonableness should account for a prudent assessment of the merits and value of the plaintiffs case, but also for the position in which the defendant has been left following an insurer’s breach of the duty to defend. No prudent defendant would fail to consider the latter circumstance. On the other hand, it should not be the court’s objective to further punish the insurer for its failure to defend its insured. The insurer has already suffered the consequences of its failure to defend by having lost the right to invoke insurance contract defenses as well as the right to assert its policy limits.

¶15 On remand, the District Court shall employ an objective standard for assessing reasonableness. We borrow the Minnesota Supreme Court’s articulation of such a standard — “The test as to whether the settlement is reasonable and prudent is what a reasonably prudent person in the position of the defendant would have settled for on the merits of plaintiffs claim. This involves a consideration of the facts bearing on the liability and damage aspects of plaintiffs claim, as well as the risks of going to trial.” Miller, 316 N.W.2d at 735 — but we note that in cases such as the one before us, a “reasonably prudent person in the position of the defendant” does not have the benefit of insurance coverage. Therefore, in assessing the reasonableness of a stipulated settlement when there has been a breach of the insurer’s duty to defend, a district court should objectively consider both the merits of the underlying case and the value to a prudent uninsured defendant of confessing judgment in exchange for a covenant not to execute. If after applying this objective standard the District Court finds $29 million to be a reasonable settlement amount, it shall enter findings of fact establishing the reasonableness and judgment in favor of Plaintiffs for $29 million. If the District Court finds $29 million to be an unreasonable amount, it shall enter findings of fact and conclusions of law to that effect and reject the settlement.

¶16 On a final note, although the District Court retains discretion to determine what evidence to admit or refuse in a reasonableness hearing, it cannot refuse to consider material and relevant evidence. Cartwright v. Equitable Life Assurance Soc’y of the United States, 276 Mont. 1, 19, 914 P.2d 976, 987-88 (1996) (citing M. R. Evid. 401, 402). We determined in Tidyman’s I that the questions NUFI raised about the valuation of the corporation are relevant to an assessment of the reasonableness of the stipulated settlement, so the District Court should allow additional discovery on and consider such evidence during the second reasonableness hearing. Tidyman’s I, ¶¶ 42, 44.

¶17 In his Dissent, Justice Wheat argues that remand for another reasonableness hearing is not necessary because the court listened to extensive testimony on the valuation of the company during the reasonableness hearing. It is true that NUFI presented such testimony, but the court rejected the valuation testimony offered by its witnesses because it “fail[ed] to account for the measure of damages for the breach of duty to defend.” Because we previously found that NUFI was estopped from denying coverage for unjustifiably refusing to defend its insureds, any measure of damages for breach of the duty to defend has no place in an ensuing reasonableness analysis. The court said it would consider reasonableness “from the perspective of the insured at the time of the stipulation,” and indeed, it was only such evidence to which the court gave credence. As noted in ¶ 11 but sidestepped by both Dissents, the District Court concluded that NUFI had lost the right to litigate the merits of the underlying case. What we are directing the court to do on remand is determine value based both on an objective determination of where the stipulated settlement is within a reasonable range of what an arms’-length negotiation would have produced and the value to a prudent uninsured defendant of confessing judgment. The court erred as a matter of law in subjectively considering valuation solely from the perspective of the uninsured defendants.

¶18 Did the District Court err by not deducting from the $29 million judgment the amount paid out to ESOP participants following Tidyman’s merger with SuperValu?

¶19 NUFI argues that the $29 million judgment is “based on impermissible double counting.” Some retirees who retired after Tidyman’s 1998 merger with SuperValu received payouts from the employee stock ownership plan (ESOP), and some of those retirees are now plaintiffs in this case. NUFI alleges that these retirees are “double counting” damages by accepting the ESOP payments and seeking damages in this case. NUFI argues that the $29 million judgment should be reduced by at least $7 million, the minimum amount paid out to ESOP participants after the merger. Plaintiffs counter that NUFI’s argument is based upon a “mischaracterization of the relationships between the parties and the different Tidyman’s entities.” According to Plaintiffs, $29 million is the amount of damage done by Davis and Maxwell to TMSI (the entity formed in the merger), and whether retirees are entitled to any of that money as employee owners of the company is a wholly separate issue governed by the terms of the ESOP and federal ERISA law. We agree with Plaintiffs.

¶20 By definition, a stipulated or consent judgment is not a court’s or a jury’s calculation of actual damages to which individual plaintiffs are entitled, but rather the amount for which two parties have freely agreed to settle a claim. As we have said before, “[a] consent judgment is £a judgment, the provision and terms of which are settled and agreed to by the parties to the action.’ A judgment by consent or stipulation of the parties is construed as a contract between them embodying the terms of the judgment. It operates to end all controversy between the parties, within the scope of the judgment.” First Bank, (N.A.) v. District Court for Fourth Judicial Dist., 226 Mont. 515, 523, 737 P.2d 1132, 1137 (1987) (quoting Black’s Law Dictionary (5th ed.) at 436); see also Linder v. Missoula County, 251 Mont. 292, 296, 824 P.2d 1004, 1004 (1992). Indeed, this reality is one of the reasons courts conduct a reasonableness hearing in the case of a stipulated settlement: “in these types of negotiations ... there is no assurance that the settlement represents a proper calculation of actual damages.” Tidyman’s I, ¶ 40.

¶21 The $29 million judgment in this case is a stipulatedjudgment, freely agreed to by Davis and Maxwell and Plaintiffs, and approved by the District Court. While the stipulated judgment is subject to an overall reasonableness assessment, it was not the result of a precise damages calculation performed by the District Court, so it does not account for deductions, credits, or offsets claimed by the insurer but not stipulated to by both parties. The question is simply “whether the settlement amount stipulated to is reasonable.” Tidyman’s I, ¶ 40. On remand, and after considering the valuation evidence presented, the District Court may decide to take into account the ESOP payouts in assessing the reasonableness of the settlement amount. However, because we are addressing a settlement here and not a trial recovery subject to statutory offsets, we conclude that the District Court did not err in declining to engage in the reductions and collateral source offsets urged by NUFI that are typical of post-trial adjustments in tort recovery actions.

¶22 Did the District Court err in awarding prejudgment interest from January 4, 2013?

¶23 We said in Tidyman’s I that “the District Court correctly determined the plaintiffs were entitled to pre-judgment interest beginning on January 4,2013, when the court approved the stipulated settlement agreements and entered judgment in the plaintiffs’ favor.” Tidyman’s I, ¶ 53. Following our remand and the first reasonableness hearing, the District Court complied with our instructions and granted the Plaintiffs prejudgment interest from January 4,2013. However, we reached the conclusion that Plaintiffs were entitled to prejudgment interest from the day the $29 million stipulated settlement was approved even though we reversed the judgment approving the settlement amount and remanded the case for a reasonableness hearing. Tidyman’s I, ¶ 50. This was in error. Plaintiffs would have been entitled to postjudgment interest, not prejudgment interest, from the day the District Court approved the settlement, but only if we had affirmed the amount of the judgment. Section 25-9-205, MCA; M. R. App. P. 19(4); Tipp v. Skjelset, 1998 MT 263, ¶¶ 16-19, 291 Mont. 288, 967 P.2d 787.

¶24 We take this opportunity to clarify that Plaintiffs are not entitled to prejudgment interest from January 4, 2013, because interest accruing after that date — the date of the court’s judgment — would by definition be postjudgment and not prejudgment interest. Rather, Plaintiffs may be entitled to postjudgment interest according to the instructions below.

¶25 The Montana Rules of Appellate Procedure provide that “[i]f a judgment for money in a civil case is affirmed, whatever interest is allowed by law shall be payable from the date the judgment was rendered or made in the district court,” but if, as is the case here, “a judgment is modified or reversed with a direction that a judgment for money be entered in the district court, the mandate shall contain instructions with respect to allowance of interest.” M. R. App. P. 19(4). We have instructed before that

In those cases in which a money judgment rendered in the district court is reversed, modified, or vacated on appeal, with the consequence that the district court is directed to enter an entirely new judgment no portion of which is discreetly identifiable from the original verdict or judgment, then interest on the new judgment shall begin to accrue only from the date the new judgment is entered on remand pursuant to this Court’s direction.

Woods v. Burlington N. & Santa Fe Ry. Co., 2004 MT 384, ¶ 10, 325 Mont. 106, 104 P.3d 1045. Therefore, if following our remand and a second reasonableness hearing the District Court approves the stipulated settlement, Plaintiffs will be entitled to postjudgment interest from the day of the new judgment, but not from the days on which the District Court approved the settlement the first and second times. Plaintiffs are not entitled to prejudgment interest, and we and the District Court erred in so holding.

CONCLUSION

¶26 For the foregoing reasons, we remand the case to the District Court for a second hearing to determine the reasonableness of Davis and Maxwell’s decision to settle with the Plaintiffs for $29 million in exchange for a covenant not to execute.

CHIEF JUSTICE McGRATH, JUSTICES McKINNON, BAKER and RICE concur.