Tidymans v. NUFI

08/23/2016
DA 15-0583
Case Number: DA 15-0583
IN THE SUPREME COURT OF THE STATE OF MONTANA
2016 MT 201
TIDYMAN'S MANAGEMENT SERVICES
INC., a Washington corporation; LENORA
DAVIS BATEMAN, VICKI EARHART,
CAROL HEALD, THERESA YOUNGQUIST,
BARBARA GAUSTAD, SHARON YOUNG,
DIANE MOLES, KYLE BAILEY, MARK
RADEMAN, DREW OLSEN, CHADNEY
SAWYER, THOMAS NAGRONE, DAN
NAGRONE, DARRELL NACCARATO, PAT
DAHMEN, JANELLE SELLS, TERRI
ORTON, WILLIAM EVANSON, BILL
EVANSON, TAMMY EVANSON, LARRY
THOMPSON, JASON GUICE, JAMIE GUICE,
LAURA SQUIBB, RICK BAILLIE, JEFFREY
TUCKER, AMY TUCKER, MARYBETH
WETSCH, LAURA STOCKTON, JERRY
STREETER, CLARA KUHN, NANCY
McDONALD, TED NUXOLL, CINDY
NUXOLL and DEAN CARLSON, individuals,
Plaintiffs and Appellees,
v.
NATIONAL UNION FIRE INSURANCE COMPANY
OF PITTSBURGH, PA and JOHN DOES 1-10,
Defendant and Appellant.
APPEAL FROM: District Court of the Fourth Judicial District,
In and For the County of Missoula, Cause No. DV 10-695
Honorable Karen Townsend, Presiding Judge
COUNSEL OF RECORD:
For Appellant:
James H. Goetz, Goetz, Baldwin & Geddes, P.C., Bozeman, Montana
Robert F. James, Mary K. Jaraczeski, Ugrin, Alexander, Zadick &
Higgins, P.C., Great Falls, Montana
Timothy R. Macdonald, Nathaniel J. Hake, Arnold & Porter LLP, Denver
Colorado,
(Attorneys for National Union Fire Insurance Co. of Pittsburgh, PA)
For Appellees:
G. Patrick HagEstad, Milodragovich, Dale & Steinbrenner, P.C.,
Missoula, Montana
(Attorney for Individual Plaintiffs, Individual Appellees)
Michael G. Black, Black Law Office, Helena, Montana
(Attorney for Tidyman’s Management Services, Inc.)
W. William Leaphart, Attorney at Law, Helena, Montana
Gregory S. Munro, Attorney at Law, Missoula, Montana
(Co-Counsel for Plaintiffs, Appellees)
For Amicus Curiae Montana Trial Defense Lawyers:
Paul R. Haffeman, Davis, Hatley, Haffeman & Tighe, Great Falls,
Montana
Martha Sheehy, Sheehy Law Firm, Billings, Montana
Submitted on Briefs: May 18, 2016
Decided: August 23, 2016
Filed:
__________________________________________
Clerk
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Justice Patricia 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
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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.
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DISCUSSION
¶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, ¶ 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.
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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
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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 plaintiff’s 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
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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 plaintiff’s
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 plaintiff’s claim.
This involves a consideration of the facts bearing on the liability and damage aspects of
plaintiff’s 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
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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 side-stepped 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
9
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,
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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 stipulated judgment, 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
11
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
12
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.
/S/ PATRICIA COTTER
We Concur:
/S/ MIKE McGRATH
/S/ LAURIE McKINNON
/S/ BETH BAKER
/S/ JIM RICE
Justice James Jeremiah Shea, concurring in part and dissenting in part.
¶27 I concur with the Court’s disposition of Issues 2 and 3. I also agree with the
standard the Court establishes for assessing the reasonableness of a stipulated settlement
when there has been a breach of the duty to defend. Opinion, ¶ 15. However, I agree
with Justice Wheat’s observation that the standard the Court articulates here is only a
slight degree of separation from the standard applied by the District Court in the first
reasonableness hearing. I also disagree with the Court’s conclusion that the District
Court failed to consider the challenges to reasonableness raised by NUFI and highlighted
13
in our opinion in Tidyman’s I. Therefore, I dissent from the Court’s conclusion on Issue
1 that this case should be remanded for a second reasonableness hearing.
¶28 The Court begins its analysis of Issue 1 by noting that 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.”
Opinion, ¶ 10 (quoting Tidyman’s I, ¶ 44). The Court then states that “[i]nstead 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.’” Opinion, ¶ 12. In fact, the District
Court specifically noted its obligation to consider the reasonableness of the stipulated
settlement in light of the challenges raised by NUFI and highlighted in Tidyman’s I, 4th
Judicial Dist. Ct., Or., p. 4 (May 12, 2015) (hereinafter, “Order”), and addressed those
challenges in Findings of Fact 89 through 92, Order, pp. 39–42. I believe the Court’s
characterization of the District Court’s reasonableness assessment gives short shrift to the
work the District Court did in the first reasonableness hearing.
¶29 To the extent that the Court suggests that the standard applied by the District Court
in the first reasonableness hearing was deficient as compared to the standard the Court
articulates in this Opinion, I submit the differences are, at most, semantic. In the first
reasonableness hearing, the District Court applied the following standard for assessing
the reasonableness of the settlement amount:
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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.
Order, p. 7. The Court criticizes this standard as “subjective” and instructs the District
Court to employ the following standard when conducting yet another reasonableness
hearing on remand:
[I]n 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.
Opinion, ¶ 15. A comparison of the two standards, however, evinces little, if any,
substantive difference.
¶30 Broken down to its discrete elements, the reasonableness standard the District
Court applied in the first reasonableness hearing has three parts: (1) consider
reasonableness from the perspective of the insured at the time of the stipulation; (2)
assess whether the information relied upon in arriving at the stipulated settlement amount
possessed sufficient indicia of reliability; and (3) determine whether the damages
represented might naturally have been expected to result from the breach of the duty to
defend. So how do these elements compare to the standard the Court instructs the
District Court to apply in the second reasonableness hearing?
¶31 First, if considering reasonableness from the perspective of the insured at the time
of the stipulation is a subjective standard, I fail to see how it is any more subjective than
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determining reasonableness by considering “the value to a prudent uninsured defendant
of confessing judgment in exchange for a covenant not to execute,” which is what the
Court instructs the District Court to do in the second reasonableness hearing. The
perspective that the District Court considered in the first reasonableness hearing was
Maxwell and Davis’s perspective as defendants who were left without “the benefit of
insurance coverage” due to NUFI’s breach, a factor this Court says is an appropriate
consideration, Opinion, ¶ 15. The District Court considered Maxwell and Davis’s
perspective “at the time of the stipulation,” because that is the time when, to borrow the
language the Court uses in the new standard, Maxwell and Davis “confess[ed] judgment
in exchange for a covenant not to execute.” I view these elements as substantively the
same.
¶32 Second, the District Court considered whether the information relied upon in
arriving at the stipulated settlement possessed “sufficient indicia of reliability.” Again, I
view this as substantively the same as the Court’s directive that the District Court should
“objectively consider . . . the merits of the underlying case.” The information relied upon
by the parties in arriving at the stipulated settlement included the merits of the underlying
case, at least as those merits had been developed by the time Maxwell and Davis
“confess[ed] judgment in exchange for a covenant not to execute.” In that regard, it
should be borne in mind that among the “benefit[s] of insurance coverage” that Maxwell
and Davis were denied because of NUFI’s breach was the provision of defense costs
necessary to develop the merits of the underlying case. Since NUFI’s breach deprived
Maxwell and Davis of the means and wherewithal to develop the merits of their defense,
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they had to play the cards they were dealt. Nevertheless, the District Court recognized
that it would be unreasonable to allow Maxwell and Davis to just sign off on any amount
in exchange for a covenant not to execute. This is why the District Court objectively
evaluated the information upon which the settlement was based to confirm that it
“possessed sufficient indicia of reliability.”
¶33 Finally, the District Court assessed “whether the damages represented might
naturally have been expected to result from the breach of the duty to defend.” By
incorporating this element into its reasonableness analysis, the District Court was merely
incorporating the well-established principle that when an insurer breaches the duty to
defend, it is liable for all damages flowing from the breach, including consequential
damages, which we have defined as damages “such as might naturally be expected to
result from” the breach. Freyer, ¶ 42 (quoting Mont. Petroleum Tank Release Comp. Bd.
v. Crumleys, Inc., 2008 MT 2, ¶ 64, 341 Mont. 33, 174 P.3d 948). This third element
does not have a corollary requirement in the standard the Court instructs the District
Court to use in the second reasonableness hearing. I would submit, therefore, that the
District Court’s incorporation of a consequential damages element if anything made the
District Court’s reasonableness standard more demanding than the standard it is now
instructed to use in the second reasonableness hearing. Therefore, I cannot see how this
provides a basis for reversal.
¶34 After this matter was remanded the first time, the District Court followed our
instructions and allowed additional discovery, conducted a three day reasonableness
hearing, and then issued a thorough Order in which it answered the questions that were
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set forth in Tidyman’s I. Now, the Court remands for a second reasonableness hearing
with instructions to apply a standard I find to be either substantively the same as, or less
stringent than, the standard the District Court applied during the first reasonableness
hearing. Therefore I dissent as to the Court’s resolution of Issue 1. I concur with the
Court’s resolution of Issues 2 and 3.
/S/ JAMES JEREMIAH SHEA
Justice Michael E Wheat, concurring in part and dissenting in part.
¶35 I concur with the Court’s disposition of Issues 2 and 3. However, I disagree with
the Court’s conclusion on Issue 1 that this case should be remanded for a second
reasonableness hearing. In my opinion the Court is improperly interjecting its judgment
in the place of the District Court by requesting the District Court repeat what has already
been accomplished.
¶36 In Tidyman’s I we directed the District Court to conduct a “hearing focused on the
reasonableness of the settlement amount,” with the burden of establishing
unreasonableness of the judgment on NUFI. Tidyman’s I, ¶¶ 44, 50. We directed the
court to set the parameters of the hearing at its discretion as to the need for the further
discovery of pertinent information related to the limited scope of the remand. Tidyman’s
I, ¶ 44. The directive we gave to the District Court was to follow the mandate of
§ 27-1-302, MCA, that settlement amounts in civil cases must be reasonable. We were
explicit and clear that in this case, where the insurer elected to deny coverage and
breached its duty to defend its insureds, no further analysis of whether there was
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coverage under the policy was necessary or acceptable under the law. Tidyman’s I,
¶¶ 28, 30, 33. (“If we were to hold the District Court in error for failing to analyze
coverage . . . we would be providing insurers with an avenue to circumvent the clear
requirement imposed by our precedent that where the insurer believes a policy exclusion
applies, it should defend under a reservation of rights and seek a determination of
coverage through a declaratory judgment action.” Tidyman’s I, ¶ 28.) We determined
that the District Court was obligated under the law to determine only the substantive
reasonableness of the stipulated settlement amount without evaluating the underlying
policy coverage or any inquiry into potential collusion, as we determined it did not exist
in this case. Tidyman’s I, ¶¶ 28, 50.
¶37 The Court now articulates a standard borrowed from the Minnesota Supreme
Court to be used in this case to determine whether a settlement amount is reasonable.
Opinion, ¶ 15. This standard includes the consideration of the liability and damage
aspects of the Plaintiffs’ case, including the risks of going to trial, and in this case, a
consideration of the insurer’s breach of its duty to defend its insureds. Opinion, ¶ 15.
Yet, we have already determined that the settlement should be given the presumption of
reasonableness, and the burden is on defendant NUFI to show unreasonableness.
Tidyman’s I, ¶ 41. The Court now asks the District Court to inquire into NUFI’s
questions of unreasonableness, which are almost exclusively based on issues involving
the valuation of the corporation, under what it calls an objective standard when the court
already conducted a three-day hearing and listened to testimony on those very issues.
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¶38 We have often repeated the maxim that district courts have broad discretion to
make determinations related to evidence, which we rightfully review only for the abuse
of this discretion. Watkins v. Williams, 265 Mont. 306, 311, 877 P.2d 19, 21-22 (1994).
The abuse of discretion inquiry is “not whether this Court would have reached the same
decision, but, whether the district court acted arbitrarily without conscientious judgment
or exceeded the bounds of reason.” Chipman v. Northwest Healthcare Corp., 2012 MT
242, ¶ 17, 366 Mont. 450, 288 P.3d 193 (quoting Newman v. Lichfield, 2012 MT 47,
¶ 22, 364 Mont. 243, 272 P.3d 625) (emphasis added).
¶39 Even if an insurer breaches its duty to its insured, it is still entitled to have a
district court make a determination of the reasonableness of a settlement; however the
settlement is presumed to be reasonable unless the insurer is able to show evidence of the
lack of reasonableness. Abbey/Land LLC, ¶ 17; Tidyman’s I, ¶ 41. In this case, the
District Court conducted a three-day hearing, and heard and evaluated the evidence
presented by both sides. The evidence included testimony from various experts offered
by both sides regarding the valuation of the company. NUFI has consistently argued that
without a buyer the settlement amount in this case is a pie-in-the-sky scenario and
therefore unreasonable. However, the court heard testimony that the existence of a buyer
is not the determinative factor in the valuation of a company. The Plaintiffs presented
evidence, NUFI presented evidence, and the court then evaluated the evidence to
determine that NUFI did not meet its burden to overcome the presumption of
reasonableness. But this Court is now asking the District Court to go back once again,
sift through the same evidence and apply a new standard, which in my opinion in this
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case, is only a slight degree of separation from what the court has already done pursuant
to our direction upon initial remand. Because this is a stipulated settlement the court has
one of two options: accept or reject the settlement amount. Opinion, ¶ 15. We have
already determined that there is no proof of collusion between the Plaintiffs and Maxwell
and Davis, and the record shows that the settlement amount was derived from the
conservative end of an independent valuation of the company—the assessment that was
available to defendants Maxwell and Davis at the time of the settlement negotiations.
¶40 The Court now requires the District Court to employ a new objective standard—
whether a reasonably prudent person in the position of the defendant would have settled,
taking into consideration the liability and damage aspects of the claims, the risks of going
to trial, and the lack of insurance coverage—but to what end? Not to conduct a trial on
the merits of Plaintiffs’ claims and allow NUFI to reach back and interject itself into the
litigation it chose to avoid when it left its insureds on their own to challenge the
litigation, in direct contravention of our case law. Farmers Union Mut. Ins. Co. v.
Staples, 2004 MT 108, ¶ 28, 321 Mont. 99, 90 P.3d 381. Nor to make a determination of
fraud or collusion, in direct contravention of our findings in Tidyman’s I. Nor to
independently monetize each individual aspect of the considerations included in the
objective standard, which would be an absurd and untenable exercise. NUFI was given
the opportunity to provide its best evidence of the unreasonableness of the stipulated
judgment and it simply failed to meet its burden. In my view the Court is in error by
effectively interjecting its judgment into this case and allowing NUFI a second bite at the
apple to attempt to substantiate the arguments it has already failed to adequately
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substantiate. I believe the Court has improperly lost sight of the settlement’s presumption
of reasonableness.
¶41 The Court also indicates using the proposed objective standard will avoid further
punishing the insurer for its failure to defend its insureds because 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.” Opinion, ¶ 14.
While I agree that the District Court should not seek to further punish NUFI, an
additional consequence of its failure to defend Maxwell and Davis is the loss of its ability
to negotiate the settlement at the time its insureds entered into a settlement agreement
with the Plaintiffs. There is little doubt that if NUFI would have chosen differently and
opted to defend Maxwell and Davis that the settlement negotiations would have ended
with a different result. To that I reiterate the sentiment we noted in Tidyman’s I: so what?
Without collusive wrongdoing, the result is a consequence of NUFI’s failure to defend its
insureds. Tidyman’s I, ¶ 48. I believe with this Opinion the Court is now allowing NUFI
too great an opportunity to meddle in the settlement negotiations it was excluded from by
its own choice. In my opinion, the District Court followed our directive in Tidyman’s I to
allow NUFI an opportunity to rebut the presumption of reasonableness of the stipulated
judgment, where we explicitly allowed it to set the parameters of the hearing including
conducting further discovery, and reached a conclusion that was neither arbitrary, nor
exceeded the bounds of reason, and should be affirmed. Tidyman’s I, ¶ 44. It is the
District Court’s duty, not this Court’s, to determine the facts, and weigh the credibility of
the evidence presented before it to make reasoned findings and we should not supplant its
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judgment with our own. If the Court desires to adopt a new objective standard for district
courts to apply in cases such as these, at most we should do so in this Opinion and find
any error that occurred on remand to be harmless because the court did what we asked of
it in Tidyman’s I and the result did not create reversible error.
¶42 For the foregoing reasons, I respectfully dissent from the Court’s disposition of
Issue 1 regarding the remand of this case for a second reasonableness hearing. I concur
with the majority on Issues 2 and 3 of this Opinion. Therefore, I would affirm the
District Court’s order as to Issues 1 and 2.
/S/ MICHAEL E WHEAT
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