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Redding v. Prosight Specialty Management Co., Inc.

United States District Court, D. Montana, Helena Division

February 27, 2015


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[Copyrighted Material Omitted]

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For Anderson ZurMuehlen & Co., P.C., Movant: Annie Harris, Gregory C. Black, Robert M. Carlson, LEAD ATTORNEYS, CORETTE BLACK CARLSON & MICKELSON, Butte, MT; G. Patrick HagEstad, LEAD ATTORNEY, MILODRAGOVICH DALE STEINBRENNER, Missoula, MT.

For Billie L. Redding, Plaintiff: John M. Morrison, Linda M. Deola, LEAD ATTORNEYS, Brian J. Miller, MORRISON, SHERWOOD, WILSON & DEOLA, PLLP, Helena, MT; Richard M. Layne, LEAD ATTORNEY, PRO HAC VICE, LAW OFFICE OF RICHARD M. LAYNE, Eugene, OR.

For Prosight Specialty Management Company, Inc., also known as Mutual Marine Office, Inc., ProSight Specialty Insurance Group, Inc., also known as Nymagic, Inc., New York Marine and General Insurance Company, Mutual Marine Office, Inc., Defendants: Gary M. Zadick, LEAD ATTORNEY, UGRIN ALEXANDER ZADICK & HIGGINS, Great Falls, MT; Mark C. Goodman, Michelle P. Alborzfar, LEAD ATTORNEYS, PRO HAC VICE, HOGAN LOVELLS U.S. LLP, San Francisco, CA; Robert S. Bennett, LEAD ATTORNEY, HOGAN LOVELLS U.S. LLP, Washington, DC.

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Summary of Case

[Insurer delivered policy limits of $4 million to Linda Deola, attorney for Plaintiff Redding, and six other plaintiffs to settle prior case against accounting firm Anderson ZurMuehlen. Redding alone by Deola as counsel now sues insurer for bad faith failure to timely settle prior case. Plaintiff is unable to explain her claim in deposition. Deola is disqualified as counsel here so she could testify as a necessary witness to facts in the prior case. Co-counsel, partner Brian Miller, takes over case. Onerous discovery violations and other bad faith by Plaintiff's counsel. Attempted disqualification of judge is denied. Held: Summary judgment for insurer with award of attorney fees and costs against counsel Deola and Miller.]

This is an unusual third-party bad faith insurance case. It is best understood divided into three distinct phases or segments of litigation, and the Court sets forth at some length and in some detail this extraordinary background before addressing multiple pending motions.

First Phase--Underlying Tort Litigation

The first phase began with Plaintiff Billie Redding's 2009 tort claim against the Anderson ZurMuehlen & Co., P.C. (" AZ" ) accounting firm. Plaintiff Redding was a long-time client of AZ, receiving traditional accounting services and tax advice. AZ had created a subsidiary called " AZ Real Estate & Business Brokerage," doing business as " Acquiron, LLC." In 2004, Plaintiff Redding wanted to dispose of her substantial ranch and replace it with a stream of income, but she would be faced with approximately $1.5 million in income taxes. Her AZ accountant referred her to Acquiron for a possible I.R.C. § 1031 property exchange that would allow her to avoid this tax penalty. Acquiron advised her to consider a § 1031 exchange of her ranch for tenancy-in-common shares (" TICs" ) of commercial properties sold by DBSI. The Internal Revenue Service had approved DBSI TICs as a suitable vehicle for § 1031 exchanges. In addition to avoiding taxes, Redding was to receive payments of $13,000 per month increasing over a ten year period to $22,000 per month. With the advice of her personal attorney, Redding decided to participate in this transaction. Unfortunately, four years later DBSI declared bankruptcy, and Redding's monthly payments became irregular and eventually stopped.

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Acquiron also recommended the same or a similar transaction for at least six other substantial ranch clients, who likewise each suffered the loss of their monthly rental payments in 2008 or 2009. On November 11, 2008, the day after DBSI declared bankruptcy, AZ reported to its insurer, New York Marine and General Insurance Co. (" NYM" ), that there was a potential for multiple claims made against AZ and Acquiron by their clients. Redding filed suit in state court against AZ, Acquiron, her AZ accountant, and two Acquiron employees in 2009. The other six claimants filed suit against AZ and the others in 2010, 2011, and 2012. Although one suit was filed in 2010, it was not served on AZ until late 2011. Redding alleged in her complaint that her TICs were actually unregistered securities and that AZ and Acquiron and their employees had violated the Securities Act of Montana, MCA § § 30-10-101 et seq., and had committed fraud and misrepresentation in connection with the sale of the TICs as unregistered securities. The applicable insurance policy (discussed below) contained an exclusion for claims arising from the brokerage of unregistered securities.

In January, 2011, discovery was ongoing in Redding's case, and AZ's defense lawyers were planning and preparing summary judgment motions as to whether the statute of limitations had expired for the securities claim and whether the TICs were securities. AZ's defense lawyers also believed that Redding's $4.6 million in claimed damages were inflated by the fact that she had not reported all of her previously received rental income from her TICs and the fact that she claimed over $2 million in damages from non-recourse mortgage debt that she had acquired in the transaction but that (allegedly) she would never be required to repay.

On February 17, 2011, before a summary judgment motion had been filed, Redding made a demand for the $2 million policy limit applicable to her claim. At that time, a March 23rd mediation conference was already scheduled. Defendants responded to the policy limit demand by requesting that the 30-day response period be extended a few days to include the day of the mediation conference. Defendants also explained that they had not yet received an expert's report as to damages and were waiting for more information to evaluate Plaintiff's damages. Plaintiff rejected Defendant's request for an extension, and the 30-day demand expired.

The March 23, 2011, mediation conference was held as scheduled, and Stuart Kellner served as the mediator. Defendants opened with an offer of $250,000, hoping to arrive at a final settlement of somewhere between $750,000 and $900,000. Redding counter-offered with $6.5 million, which was more than three times the policy limit. Mediator Kellner decided that the mediation would not be successful that day, so he terminated the mediation.

In August 2011, a state district court ruled on AZ's summary judgment motion as to the securities issue, ruling in AZ's favor that Redding's DBSI TICs were not securities. In response, Redding filed a petition for writ of supervisory control in the Montana Supreme Court, which heard oral argument in late April, 2012, and ruled on July 5, 2012. The Montana Supreme Court held that the DBSI TICs were securities and remanded the case to the district court for further proceedings.

However, in June 2012, before the Montana Supreme Court had even issued its decision on July 5, Redding and the six other claimants settled their lawsuits against AZ in a global settlement for $4.65 million. NYM contributed $4 million to the settlement from AZ's 2008 and 2010 policies, and AZ contributed $650,000

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(which represented AZ's commissions or fees). Redding's share of the global settlement (after payment of her attorney fees and costs) was $450,844.87.

AZ was represented in the Underlying Litigation by a Montana law firm, Milodragovich, Dale, Steinbrenner & Nygren, P.C. (" MDS" ), and specifically by two MDS attorneys, G. Patrick HagEstad and Brad Condra. Plaintiff Redding was represented by Richard " Mike" Layne of Portland, Oregon, and Linda Deola, of Helena, Montana. After filing Redding's complaint in 2009, Deola subsequently acquired the five other clients and, as sole counsel for each, served their complaints in 2011 and 2012.[1] The seventh claimant, Garrison Ranches Inc., was represented by John Bloomquist.

The record in this case does not reflect that Redding gave informed consent to the multiple representations of Ms. Deola's five other clients. Redding later testified in her deposition that she did not find out that the other claimants existed until the insurance money was divided. (Doc. 259-14, Redding Depo. 65:14-17; 75:18-25.) It is not clear even now that Redding understands that Deola was retained by those other claimants for the purpose of sharing the same limited insurance proceeds that Redding was hoping would be hers alone. Redding was surprised at the time of settlement when she found out that other people were involved. (Doc. 259-14, Redding Depo. 94:18-95:17.) She testified that, at first, she didn't realize that the $4.65 million was for everybody; she hoped that sum would be used to compensate her alone. (Doc. 259-14, Redding Depo. 96:2-10.) Even at the time of her deposition in this case, Redding seemed not to understand that she and all of Deola's other clients were sharing one finite pot of insurance money. (Doc. 259-14, Redding Depo. 67:11-21.) Instead, Redding believes that she is now suing NYM because it has not yet paid her " bill" in full. (Doc. 259-14, Redding Depo. 148:3-10 (" You [NYM] are not paying your bills.... My bill.... See, it keeps adding up. It is drawing interest." ).)

In other words, Redding's contention seems to have been that she was in competition with Deola's other five clients for their respective shares of an inadequate sum certain.

Ms. Redding's testimony has caused concern about compliance with the rules regarding representation of multiple clients. Rule 1.7, Montana Rules of Professional Conduct, requires a lawyer to refrain from taking on a new representation when " there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client...." Rule 1.7(a)(2), Mont. R. Prof. Conduct. Such multiple-client representations may go forward if four conditions can be met, including the condition that " each affected client gives informed consent, confirmed in writing." Rule 1.7(b)(4), Mont. R. Prof. Conduct. The entire record does not demonstrate that this condition was met.

Second Phase--Underlying Coverage Litigation

After Redding's complaint was filed in 2009, NYM agreed to defend AZ against Redding's claim, but under a reservation of its right to deny coverage based on exclusions under the policy. The 2008 policy

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pertinent to Redding's claim had a liability limit (per claim and aggregate) of $2,000,000. In its reservation of rights letter, NYM noted that the 2008 policy excluded claims based on criminal, dishonest, or fraudulent acts or omissions, deliberate misrepresentations, or intentional or knowing violations of law. The 2008 policy also excluded claims arising from AZ or Acquiron's capacity as a broker or dealer in securities.

Because the facts underlying Redding's complaint were still being discovered and issues were being defined by motion practice in Redding's state court case, no further action was taken by NYM as to coverage. It was particularly significant to the coverage case, and favorable to AZ, that the state district court decided that Redding's TICs were not securities. Four months after the state district court ruled in AZ's favor on partial summary judgment, AZ's coverage attorney, Curt Drake, filed a declaratory judgment action on AZ's behalf against NYM in December, 2011, seeking a declaration of coverage under AZ's insurance policy. AZ's coverage complaint also named as co-defendants three of the claimants as " stakeholders" in the coverage dispute: Redding, Chevallier Ranch Company, and Richard Thieltges and Thieltges Farms. This coverage action was removed to federal court in April, 2012, and was assigned to the undersigned. See Anderson ZurMuehlen & Co. P.C. v. New York Marine & General Ins. Co., Case No. 6:12cv35-CCL. Because AZ settled with all the claimants shortly after removal, this coverage case was never adjudicated on the merits. Five months after settlement, on November 28, 2012, the parties stipulated to dismissal of the coverage case, and the Court dismissed the case with prejudice on December 11, 2012.

That declaratory judgment action had sought a ruling that NYM owed a duty to indemnify AZ under the applicable NYM insurance policies. (NYM was already defending.) There were serious factual and legal questions in the coverage lawsuit, the adjudication of which would have determined whether there was $4 million of coverage available on two policies, $2 million of coverage on one policy, no coverage at all under either policy, or only partial coverage for some claims and not others on one or more policies. Both of the policies at issue, the 2008 policy and the 2010 policy, were professional insurance policies that explicitly provided that before NYM could settle a claim, the insured AZ had to consent, in writing, to the settling of the claim. (Doc. 253-1 at 20.) These were also " claims made and reported" policies, i.e., after the first claim was made, subsequent related claims were to be deemed submitted under the original policy year. While there would only be one deductible for all related claims, all related claims would be limited by the aggregate coverage available ($2 million) under the original policy year. (Doc. 253-1 at 21.) Of particular importance to AZ, the insurance policy excluded coverage of securities transactions and criminal, dishonest, or fraudulent acts or deliberate misrepresentations or intentional or knowing violations of the law. (Doc. 253-1 at 3,22.)

AZ was represented in this coverage litigation by Curt Drake. NYM retained Robert Guite of the Squire Sanders law firm in San Francisco to represent it in the coverage litigation, and he remained the sole attorney of record for NYM until that case was dismissed on December 11, 2012. See Anderson ZurMuehlen & Co. P.C. v. New York Marine & General Ins. Co., Case No. 6:12cv35-CCL (Doc. 16, Order of Dismissal dated December 11, 2012). Linda Deola represented co-defendants Redding, Chevallier Ranch Company, and Richard Thieltges and Thieltges Farms.

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Third Phase--Bad Faith

The third phase is the instant case involving a bad-faith insurance complaint filed by Redding, represented solely by Ms. Deola, in state district court against NYM. The case was removed to this Court in October, 2012. In this case, Redding has alleged, among other things, that NYM acted in bad faith in its settlement of her claim.

Ms. Deola apparently expected to find evidence that would prove NYM's bad faith in its handling of Redding's claim against AZ. Redding's counsel apparently believed that NYM prevented AZ from settling her case much earlier than it settled. Ms. Deola testified in her deposition that " AZ had been telling me all along, we want to settle this case, it's New York Marine that's not putting up the money, they are the problem, not AZ." (Doc. 259-1, Deola Depo. II 83:21-24; 103:5-19.) The record clearly establishes AZ did not decide to settle with Redding until just days or weeks before it entered into its settlement agreement with Redding. (Doc. 259, Carlson Depo. I, 29:9-17; 32:3-13, 38:20-39:18.) Indeed, before June 15, 2012, there was no written request or consent from AZ to NYM (as was required by the insurance policy) that notified or requested NYM to settle Redding's claim against AZ.

However, AZ did decide in May 2012 that it wanted all the claims settled because AZ felt (correctly as it turned out) that it had more exposure after the Supreme Court oral argument on April 25, 2012, which did not go well for AZ. (Doc. 259, Carlson Depo. I, 44:9-22.) Mr. Gary Carlson, AZ's Chief Operating Officer, summarized AZ's position on May 25, 2012, in an email to AZ's defense counsel and to Don Laine, AZ's President, by stating:

From our point--the settlement negotiations with Deola must include the Garrison case, the Schindler case that is about to be served, as well as the " other" party she has contacted, as well her [Ms. Deola] ceasing to use the " list" she has of Acquiron transactions to obtain further cases against AZ or Acquiron.

( Doc. 265-3 at 3.)

Plaintiff's allegations now before the Court are that NYM failed to settle with Redding when she made a $2 million policy limit demand in February, 2011, that NYM required the six other claimants to settle their claims in a global settlement before it would settle with Redding (thereby leveraging Redding's desire to settle in order to obtain a settlement with the other six claimants), and that NYM did not timely pay the insurance proceeds after a global settlement was reached between the seven claimants and AZ.

When it came time to settle the case in May 2012, AZ and Redding were concerned about what they would do if NYM refused to provide coverage for Redding's claim and the other five claims. Drake and Deola discussed a proposal whereby Redding would settle separately with AZ, which would then assign to Redding its first-party bad faith and breach of contract claims against NYM (for failure to settle), allowing Redding to sue NYM for both her third-party bad faith claim and AZ's first-party bad faith claim and the breach of contract claim. (Doc. 259-11, Deola Depo. II, 71:16-73:25.) This is generally called a Damron agreement. See Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (Ariz. 1969).

There is nothing inherently wrong with a Damron agreement, whereby, if, after the insurer fails to defend or otherwise breaches the insurance contract, the insured confesses judgment in a specific amount and assigns to plaintiff its firstparty bad faith and contract claims against the insurance company, all in exchange for plaintiff's covenant not to execute upon the insured's assets. Of course,

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the Damron settlement agreement must be reasonable in amount and not otherwise fraudulent, collusive, or against public policy. See, e.g., Tidyman's Mgmt. Servs. v. Davis, 2014 MT 205, 376 Mont. 80, 330 P.3d 1139, 1154 (2014) (recognizing " the opportunity for mischief in settlement negotiations where the insurer has declined involvement--which may be checked by judicial review of whether the settlement amount stipulated to is reasonable." ).

However, a Damron agreement must be preceded by some breach of the insurance contract by the insurance company, such as would justify the insured's breach of the standard cooperation clause in the insurance contract. In Damron, for example, the insurer's breach was its failure to defend the insured. See Damron, 460 P.2d at 999 (quoting Critz v. Farmers Ins. Group, 230 Cal.App.2d 788, 41 Cal.Rptr. 401 (Cal. Ct.App. 1964) (" When the insurer breaches its obligation of good faith . . . . there is an acute change in the relationship between policyholder and insurer." )). If such an agreement is entered into between the insured and the claimant, but it is later determined that the insurer did not, in fact, breach any of its obligations, then the insurer will not have to pay the stipulated judgment. See Safeway Ins. Co., Inc. v. Guerrero, 210 Ariz. 5, 106 P.3d 1020 (Ariz. 2005). Generally, when an insured enters into a stipulated settlement with a claimant without notice to an insurance company, that breach of the cooperation clause relieves the insurance company from any liability under the policy. See, e.g., Smith v. Progressive Cas. Ins. Co., 61 S.W.3d 280 (Mo.App. E.D.. 2001); see also Safeco Ins. Co. v. Superior Court, 71 Cal.App.4th 782, 84 Cal.Rptr.2d 43 (Cal. Ct.App. 1999) (holding, despite a reservation of rights, that " when the insurer provides a defense to its insured, the insured has no right to interfere with the insurer's control of the defense, and a stipulated judgment between the insured and the injured claimant, without the consent of the insurer, is ineffective to impose liability upon the insurer." ).

In addition, the NYM insurance policies, as with many professional insurance contracts, explicitly prohibited the insured from settling without the consent of the insurance company. See Doc. 253-1 at 27-28, and Doc. 253-2 at 31-32 (¶ 9.4, ¶ 9.9).) Such a provision is waived by wrongful denial of coverage or refusal to defend. In this case, the insurer did defend, albeit under a reservation of rights, but ultimately agreed to provide full policy limits coverage. Therefore, given the contract provisions ¶ ¶ 9.4 and 9.9 (" An agreed settlement means a settlement and release of liability signed by us, you and the claimant or the claimant's legal representative." ), it would appear that NYM was contractually entitled to be a party to any settlement agreement between AZ and its claimants. (Doc. 253-1 at 27-28.)

The key feature of a Damron proposal in the Underlying Action would have been that Redding would release any claim she might have to AZ's assets, thereby releasing AZ from its excess liability as to her claim. In fact, on May 20, 2012, Drake prepared and circulated a settlement document between AZ and Redding, without the knowledge of NYM, that called upon Redding to agree not to execute on AZ's assets in return for a confession of judgment by AZ and AZ's cash payment to Redding of $10,000. (Doc. 265-3 at 5.)

In December, 2011, just prior to filing the coverage lawsuit, Drake had requested Deola's permission to name Redding and several other of Deola's clients as nominal defendants, on the theory that they were " stakeholders" in the policies, and Deola consented. Because Drake was in charge of AZ's coverage dispute with NYM, Drake was clearly adversarial to NYM throughout the underlying litigation. However, it appears that he may have at

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certain points led the negotiations for the settlement of the Underlying Action.

Drake also gave to Deola his own opinions (adopted by her) as to the availability of coverage through NYM and also through any other insurance carriers relevant to NYM's co-defendants Petersen and Ahmann. ( See Doc. 259-10, Deola Depo. I, 40:14-21 (" But I know that there was discussions about AZ's policies in 2012 with Mr. Drake, AZ's coverage counsel." ); 41:18-23 (" So I would have reviewed [the policy] and read it but the interpretation and application of the policy really would have come from discussions with AZ's coverage counsel, Mr. Drake." ); 43:15-20 (" No, I would have relied on the coverage counsel to [determine whether there was coverage]." ); 93:1-9 (" so I was relying upon [Drake] to ultimately tell us which coverage was available." ).)

Sometime between May 21 and June 5, 2012, Drake told Deola that there would be $4 million in NYM insurance coverage available to settle all claims. (Doc. 259-10, Deola Depo. I, 93:10-25.)

During early 2012, AZ was facing (by the accounts of various lawyers) approximately $10 to $30 million in damage claims alleged by seven of their former clients. The problem was that AZ possessed only $4 million in insurance coverage, at most, to pay the claims (but perhaps only $2 million or perhaps even no coverage). Drake apparently put out the suggestion of having AZ confess judgment and assign to Redding any right it had to a first-party bad faith claim against NYM (in exchange for Redding's agreement not to execute on AZ's assets) in case NYM did not provide coverage and also to manage the problem of AZ's excess liability. The fact that AZ's coverage was itself precarious only exacerbated the total risk. According to MDS counsel, AZ believed that if it were made responsible for all the damages alleged by the claimants (in the $10-$30 million range), AZ would be forced into bankruptcy. The plan seems to have been either (1) to have AZ confess judgment for $4 million, with perhaps some extra cash paid by AZ, in exchange for an agreement by the claimants not to execute on AZ's assets, or (2) to have NYM actually pay the claimants $4 million through a negotiated settlement, and in exchange have the claimants release their all claims against AZ. Either way, AZ and its assets would be protected and all seven claims against it would be resolved. Either way, the plan was to require the seven claimants to give up their excess claims against AZ.

Throughout the settlement process, Drake and Deola communicated about the insurance company's alleged bad faith, with the result that Deola apparently believed that AZ wanted to settle with her clients but was being blocked from doing so by bad faith misconduct of NYM. At some point in the settlement process, Drake knew that Deola was considering filing a third-party bad faith claim on behalf of Redding against NYM.

By late May and early June, 2012, Drake appears to have been involved in the tort cases as a negotiator for AZ, to the extent that defense counsel (Patrick HagEstad of the MDS law firm) was coordinating his negotiation activity with Drake. It was HagEstad's role to keep NYM informed as to settlement negotiations. After five or six weeks of settlement negotiations, however, HagEstad suffered a heart attack and his associate, Brad Condra, substituted in for him and saw the case to its conclusion; Condra therefore handled communications with NYM in late June and July, 2012. However, sometimes the MDS lawyers (HagEstad and Condra) were not kept in the loop of communications between Drake and Deola.

When AZ's officers and directors decided in mid-May, 2012, that they wished to

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settle all the claims, and quickly, Drake contacted Deola on May 18, 2012, to find out what she would demand for a global settlement. (Doc. 259-1, Carlson Depo. II, 13:14-24.) AZ definitely wanted to settle all claims together. (Doc. 259-1, Carlson Depo. II, 20:2-3, 49:13-15 (" But our interest was in facilitating and completing the overall global settlement." ).) HagEstad asked Deola to present a demand for her six clients, which she did. (Doc. 259-10, Deola Depo. I, 97:7-9.) On May 22, 2012, the NYM claims adjuster noted in his claims file that HagEstad reported " that Plaintiff's attorney may want to bundle all six claims and settle them presumably under this file and policy. I have asked DC [defense counsel] to confirm and report his findings to me." (Doc. 258 at 9.) On May 29, 2012, HagEstad asked Deola if the settlement would also include the one claimant (Garrison Ranches) not represented by Deola. (Doc. 259-12 at 2.) The next afternoon, May 30, 2012, Mike Layne emailed Deola, and told her that " if . . . we can pin down the insurance company to say full settlement with all parties or no settlement at all, I think we can take the settlement and preserve our bad faith claims against the insurance carrier." (Doc. 276-1 at 3.) Hours later, Deola emailed HagEstad and said,

I want to be sure I understood this email from you that the insurance company will only put up what I understand to be two policy limits if all of the Plaintiffs agree to settle. Talk to you soon.

( Doc. 259-12 at 2.)

This email is relevant to NYM's defense of unclean hands, and it provides information that cannot be obtained by any other means. (Doc. 3, Answer at 11, Second Affirmative Defense.) See Charlotte Motor Speedway, Inc. v. Intl. Ins. Co., 125 F.R.D. 127, 130 (M.D.N.C. 1989) ( permitting discovery of privileged material because " the activities and advice of Plaintiff's counsel in the settlement of the underlying action are inextricably interwoven" with the issue of liability); see also 4J. Moore, Federal Practice 26.64[4] ( " [W]hen the activities of counsel are inquired into because they are at issue in the action before the court, there is cause for production of documents that deal with such activities, though they are 'work product.'" ). Nevertheless, the instant decision is not based on this one email. That Redding's counsel were considering setting NYM up for a subsequent bad faith lawsuit is apparent from the record and, perhaps more important, was well known by some, if not all, of the individuals working on the litigation. As early as May 31, 2012, HagEstad informed Gary Carlson of AZ in an email that " [Deola] is confident that she has set the carrier up for no limits." (Doc. 259-1, Carlson Depo. II, 49:18-19.)

HagEstad testified at length on the subject of Deola's May 30 email when Deola questioned him during his deposition:

Q. [Deola] And then when the inquiry was made by May 30th as to whether or not the insurance company would only put up the policy limit demands if all plaintiffs agreed to settle, no dispute, you never refuted that in writing?
A. [HagEstad] It never came up. That's not what was going on.
Q. [Deola] I'm just simply asking you when you look at Exhibit 7 [Deola's 5/30/12 email to HagEstad], it asks for a clarification, does it not the May 30, 2012, e-mail back to you?
A. [HagEstad] Right. And we had a phone call about it.
Q. [Deola] And I'm asking you whether or not you responded to that inquiry in writing?
A. [HagEstad] I don't know.
Q. [Deola] Okay.
A. [HagEstad] I'm pretty sure we had a phone call about it though. Because

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at this point I remember being confused again saying where is this coming from, I'm just going to call them.
Q. [Deola] Where is what coming from?
A. [HagEstad] Your response. Because nobody had ever told you that the insurance company will only put up what I understand to be two policy limits if all the plaintiffs agree to settle.
Q. [Deola] Did you [think] that was an important fact to clarify?
A. [HagEstad] Well, let me just tell you this, one, I was always clear with you that we did not know how many policy limits were available. So I never would have represented at any time until Nick gave me okay that two policy limits were available, so that's the first thing.
Second thing is prior to this I don't remember anybody saying that the insurance company will only put up what I understand to be policy limits if all of the plaintiffs agree to settle. I don't remember ever telling you that.
Q. [Deola] So my question to you is: Do you think that would have been an important fact to clarify?
A. [HagEstad] And we did so by telephone call.
Q. [Deola] And that's your testimony that there was a phone call that clarified that?
A. [HagEstad] Yes.

( Doc. 259-4, HagEstad Depo. 103:22-105:14.) During this deposition by Linda Deola, HagEstad also testified that " [i]t wasn't that this [global settlement] had to be this way, it was this is what I thought we were working on." (Doc. 259-4, HagEstad Depo. 100:17-19.)

HagEstad absolutely denied that he had conditioned a global settlement on releases of all the Defendants: " No, I did not make that representation. This email [HagEstad's email on 5/29] is an inquiry as to what did you envision this to be." (Doc. 259-4, HagEstad Depo. 106:7-14.) HagEstad explained,

" No, what it was, was an inquiry as to what did you mean, were all these things included, is that what you were envisioning, because I was trying to see if we're on the same page. There's no condition in this and there never was as I recall, it's this way or the highway. I do not remember that at all."

( Doc. 259-4, HagEstad Depo. 107:14-20.)

Deola questioned HagEstad whether it was his idea to include the Garrison Ranch in a global settlement:

Q. [Deola] I know we've been over this, but this is important and that's why I'm asking you again. You would agree that the Garrisons were never included in the only written demand you received from the plaintiffs in this case, were they?
A. [HagEstad] Right. And they were included based upon discussions that you and I and others on my behalf and Mr. Gallik.
Q. [Deola] And that inclusion of the Garrisons was an issue raised by the defendants in this case, was it not, the Redding plaintiffs didn't ask for the Garrisons to be included in this settlement, did they?
A. [HagEstad] We didn't ask for them to be either. We asked if they were.

( Doc. 259-4, HagEstad Depo. 107:21-108:3.) When asked whether AZ requested the inclusion of Garrison Ranch in the settlement, HagEstad responded, " No, I think we probably asked if that was part of it. And we were told that could be worked out if Brian's[2] clients agreed to it, that

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your [Deola's] clients would." (HagEstad Depo. 100:24-101:2.) In fact, HagEstad testified, it was Deola herself who first contacted Garrison Ranch:

Q. [Deola] Okay. Did you contact the Garrison's attorneys in May of 2012 and ask them for a demand on behalf of the Garrisons?
A. [HagEstad] As I'm sitting here, I want to say that the first contact with the Garrisons about this was from you after a conversation that you and I had where you would see if they were even interested in it. And then I think you called me back at some point and said they're interested, they want to talk to you, that you can't speak for them.
Q. [Deola] But my question was whether or not you ever contacted the Garrison's counsel in May of 2012 and requested a demand for settlement from them separately.
Q. [HagEstad] No. My recollection was after you had indicated that they would consider the idea, either myself or someone on my behalf contacted them and they indicated they would consider being part of a global settlement.

( Doc. 259-4, HagEstad Depo. 111:23-112:24.)

During his deposition, HagEstad finally stated that " [my] recollection, Lin, is and I apologize if I'm not remembering this correctly, but my recollection is you, you either offered to or said that you would [contact Garrison's attorney] and I said okay." (Doc. 259-4, HagEstad Depo. 114:7-10.)

Overall, HagEstad described his working relationship with Deola as " two ships in the night" : " you and I missed each other. I would be thinking one thing, you would be thinking something else, so there was a lot of phone calls to try and say what do you mean." (Doc. 259-4, HagEstad Depo. 101:20-25.)

So, eventually, Deola telephoned counsel for Garrison Ranches, John Bloomquist, and learned that his client would be willing to consider a global settlement. HagEstad ascertained that NYM's claims adjuster was interested in hearing more about the possibility of a global settlement with a possibility that NYM might decide to fund the settlement with $4 million, and HagEstad communicated that fact to Drake. (Doc. 265-3 at 6.)

In early June, 2012, while HagEstad was in Texas on a family vacation, Drake was leading the negotiations for AZ, and all seven plaintiffs agreed with AZ to settle their claims for $4.65 million. The global settlement agreement called for NYM to contribute $2 million from each of two insurance policies and for AZ to contribute $250,000 in cash and $400,000 in four annual installments beginning one year later.

On June 5, 2012, upon learning from Deola that the claimants agreed to accept $4.65 million, HagEstad informed Deola and Drake that NYM had not yet agreed to pay any policy limits--much less two policy limits totaling $4 million--so AZ did not yet have $4 million in insurance proceeds to offer the claimants. (Doc. 259-4, HagEstad Depo. 141: 18-21.) HagEstad testified that Drake did not consult him about what NYM would or would not pay. (Doc. 259-4, HagEstad Depo., 140:6.) HagEstad was waiting for NYM to make a decision on coverage, before he would know how to respond to Deola's demand, and HagEstad did not know that Drake had made an offer on AZ's behalf. On June 5, 2012, HagEstad sent an email to

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Drake on his iPhone that said that NYM's claims adjuster was " waiting for a coverage opinion on whether just one policy." (Doc. 265-3 at 8.) NYM was not immediately informed by anyone of the global settlement between the insured and the claimants. Not realizing that Drake had been negotiating separately with Deola, HagEstad believed that Deola " had accepted her own offer," as HagEstad explained the situation to NYM's claim adjuster. (Doc. 259-4, HagEstad Depo., 138:18-22; 149:23-24.) Meanwhile, AZ was pleased at having settled all the claims against it (Doc. 265-3 at 2, 270-4 at 2), and Drake had begun drafting a settlement and release agreement to be signed by the plaintiffs (Doc. 125-18 at 1).

Two weeks later in June, 2012, NYM finally received notice of the settlement between the claimants and AZ from the MDS law firm, which also informed NYM that AZ requested and HagEstad recommended that NYM agree to fund its $4 million share of the $4.65 million settlement. (Doc. 258-15 at 7.) NYM's position as to coverage was not yet settled. NYM demanded that defense counsel provide executive summaries of each claim to be settled, one of which had been filed less than two weeks earlier and was relatively unknown to NYM. (Doc. 258 at 7.) After considering defense counsels' summaries and recommendations, NYM agreed to fund $4 million for the global settlement. On June 30, 2012, Brad Condra emailed AZ President and CEO, Donald Laine, to inform him that NYM had agreed to contribute $4 million to the global settlement. (Doc. 259-21 at 3.) AZ understood that, while the $4 million would be paid, AZ's coverage dispute with NYM would remain. (Doc. 259-1, Carlson Depo. II at 191:7-21; Doc. 259-17, Laine Depo. 132:14-133:12.)

While the plaintiffs urged an immediate transfer of funds, they eventually agreed to a payment deadline of July 27, 2012; NYM transferred $4 million to Deola on July 27, 2012, by hand delivery by Brad Condra to Linda Deola. (Doc. 259-11, Deola Depo. II, 107:14-20.) Deola then distributed funds to Redding, to her other clients, and to herself and the other two plaintiffs' counsel.

Before that payment occurred, however, a serious glitch arose in July, 2012, when NYM received a draft of the " Settlement Agreement and Release of all Claims." (Doc. 259-20.) This document was prepared by Drake, revised by Deola, and then signed by all of the claimants, perhaps even before NYM had a chance to suggest any revisions. The document did not provide a release of NYM by any of the claimants. Of even greater concern to NYM, the document specified that NYM was not released as to any violations of Montana insurance law. By this time, all the attorneys involved knew that Deola was threatening to sue NYM for bad faith after the tort claims settled, and that intention was clearly telegraphed in paragraph 9 of the Settlement Agreement. (Doc. 259-20 at 5). This information apparently caused NYM consternation in the two weeks before it cut two $2 million checks.

In response, however, NYM was undeterred from its previous agreement to fund the settlement. NYM did not require any release for itself. It informed AZ that it would make the $4 million payment as agreed, but under a reservation of rights to recoup the $4 million from AZ after the coverage adjudication. In the alternative, NYM proposed that AZ agree to indemnify it as to any future claims arising out of the Coverage Action or the Underlying Action.

Once again, in the days just prior to NYM's payment of all seven claims, Drake began discussing with Deola the possibility of another confession of judgment by AZ

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and an assignment of AZ's first-party bad faith claim in exchange for a waiver of lien on AZ's assets. (Doc. 217-8 at 8.) At about the same time, on July 20, Drake's email to Deola proposed an anticipatory press release to be released if NYM did not transfer funds as agreed. The press release proposed by Drake states that AZ and the claimants were unhappy because NYM had refused payment after not obtaining settlement terms favorable to it and that the claimants would be forced to sue NYM for payment. (Doc. 217-6 at 13 (DL 141).) However, both of these alternate plans were apparently abandoned, because NYM did in fact transfer the $4 million payment to Deola on July 27, 2012, albeit under a full reservation of rights by NYM to recoup from AZ not just the $4 million, but " all amounts paid by New York Marine...." (Doc. 259-27 at 2-3.) The three plaintiffs' counsel (Deola, Layne, and Bloomquist) then divided the $4 million among themselves and their respective clients. NYM was never fully informed of the distributions until finally Deola disclosed that information after the close of discovery in this case. The coverage action was apparently settled between NYM and AZ in July or August, 2012, and a stipulation for dismissal of that case was filed five months later, in December, 2012.

In the Underlying Action, Redding claimed damages in excess of the 2008 insurance policy that was applicable to her claim. That policy carried an aggregate limit of $2 million. NYM paid the 2008 policy limit of $2 million over to Ms. Redding's counsel. During discovery, Redding failed to disclose any settlement/allocation distribution documents or to itemize the documents on a privilege log, even though such documents were requested by NYM in discovery. (Doc. 259-11, Deola Depo. II, 3:14-6:12.) Eventually, it was revealed that Deola distributed approximately $450,000 to Redding from the $2 million payment and the rest to her other five clients, plus Bloomquist and his client. (In addition, Deola's other five clients and Bloomquist's client also shared in the $2 million proceeds from the 2010 policy.) Of the $2 million policy proceeds available and applicable to Redding's claim, Redding's share was $681,696.96 (less attorney fees and costs), as was finally revealed when Deola testified at her second deposition. (Doc. 259-28 at 2.)

Deola testified that her attorney fee percentage as to Redding was only 14% of Redding's recovery, because she split her fee with co-counsel, Mike Layne, who received 19% of Redding's recovery. (Doc. 259-11, Deola Depo. II, 24:19-23.) As to her other five clients, however, Deola served as the sole plaintiff's counsel, and she testified that her fee percentage as to three of her other clients was 33% each, and as to two of her other clients her fee was 30% each. (Doc,. 259-11, Deola Depo. II, 32:17-19, 33:3-19.) Deola received ...

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