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In re Estate of Cote

Supreme Court of Montana

January 15, 2019

IN THE MATTER OF THE ESTATE OF: JOHN P. COTE, SR., Deceased,
v.
JANICE SMITH-COTE, individually and as Personal Representative of the ESTATE OF JOHN P. COTE, SR., and John Does 1-10, Defendants, JOHN P. COTE, JR., individually, KATHERIN CLEMMENCE, individually, and KATHERIN CLEMMENCE and BARBARA C. McEWEN, as Trustees of the RUTH COTE TRUST, Plaintiffs and Appellees, and FARMERS STATE FINANCIAL CORP., Defendant and Appellant.

          Submitted on Briefs: November 14, 2018

          APPEAL FROM: District Court of the Twenty-First Judicial District, In and For the County of Ravalli, Cause No. DP-12-72 Honorable John W. Larson, Presiding Judge

          For Appellant: David L. Jackson, John H. Grant, Murry Warhank, Jackson, Murdo & Grant, P.C., Helena, Montana Shannon Wells Stevenson, James R. Henderson, Davis Graham & Stubbs LLP, Denver, Colorado

          For Appellees: Robert Terrazas, Dana A. Henkel, Jesse Froehling, Terrazas Clark Henkel, P.C., Missoula, Montana

          OPINION

          JAMES JEREMIAH SHEA JUDGE

         ¶1 Farmers State Financial Corporation (Farmers) appeals the Order of the Twenty-First Judicial District Court, Ravalli County, awarding punitive damages against Farmers for fraudulent stock conversion.

         ¶2 We restate the issues as follows:

Issue One: Whether the District Court Order restoring John Cote, Jr.'s converted Stock constituted an award of compensatory damages for purposes of determining an award of punitive damages.
Issue Two: Whether the District Court erred by finding that Farmers was subject to punitive damages because it acted with actual malice.
Issue Three: Whether the award of punitive damages was excessive.

         ¶3 We affirm.

         PROCEDURAL AND FACTUAL BACKGROUND

         ¶4 This appeal arises from an estate contest between Janice Smith-Cote, wife of John P. Cote, Sr. (John Sr.), John P. Cote, Jr. (John Jr.), and other members of the Cote family. This Court affirmed an earlier appeal in which the District Court replaced Smith-Cote as personal representative of John Sr.'s estate. See In re Estate of Cote, No. DA 16-0295, 2017 MT 11N, ¶¶ 2, 16, 2017 Mont. LEXIS 13.[1] The current appeal involves shares of Farmers' Stock that John Jr. owned with his father, John Sr., and Farmers' disposition of shares of that stock relative to John Jr.

         ¶5 On November 27, 1995, Farmers (then called Alpha-Omega Holding Company) issued stock to John Sr. and John Jr. as joint tenants with right of survivorship (JTWROS). On March 26, 1997, John Sr. and John Jr. jointly owned 181.619 shares pursuant to Farmers' Stock Certificate No. 20, which identified the owners as "John P. Cote, Sr., or John P. Cote, Jr., JTWROS."[2]

         ¶6 In January 2011, John Sr. and Smith-Cote were living in Renton, Washington. Farmers communicated with Smith-Cote about transferring Stock ownership from John Sr. and John Jr. to John Sr. only. On January 19, 2011, Farmers' Executive Secretary sent Smith-Cote an e-mail with an attached "Stock Power Form" recognizing John Sr. and John Jr. as owning the Stock as JTWROS. The same day, Farmers' President sent an e-mail to the Executive Secretary regarding the proposed transfer of Stock ownership:

[W]ill you find out ihow [sic] [Smith-Cote] wants the [S]tock titled? Will it be just in her name or if John Jr. will be on it also as he is now?? He doesn't need to be, I just want to make sure it is how [John Sr.] wants it. [I]f so whether it is joint with survivorshilp [sic] or as tennats [sic] in common. . . .

         ¶7 John Sr. purportedly signed two stock power forms, one dated January 21, 2011, and the other dated February 3, 2011. Farmers' policies and procedures require each stock owner's signature on a stock power form to be accompanied by a medallion signature guarantee to effectuate transfer of Farmers' stock. A medallion signature guarantee is an endorsement affixed to a request to transfer a security by the transferring financial institution that guarantees the genuineness of the signature and the legal capacity of the signatory. John Jr. and John. Sr.'s Stock required an Edward Jones' medallion signature guarantee.[3] The January 21, 2011 Stock Power Form (January Form) was sent to Edward Jones' offices in St. Louis, Missouri. No Edward Jones' employee authorized to affix the medallion signature guarantee witnessed the execution of the January Form. However, several days after John Sr. allegedly signed the January Form, an Edward Jones employee affixed a medallion signature guarantee to the Form. Farmers claimed it never received the January Form, and the January Form was not found in Farmers' records. On February 2, 2011, Farmers contacted Smith-Cote to notify her no signed form had been received.

         ¶8 On February 3, 2011, John Sr. purportedly received and signed a second Stock Power Form (February Form) in an attempt to transfer all 181.619 shares of the Stock to Smith-Cote. Edward Jones has no records of any employee being present to witness the execution of the February Form. On February 5, 2011, John Sr. passed away. On February 7, 2011, the local branch of Edward Jones transmitted the February Form to the Edward Jones' St. Louis office. At an uncertain point in time, the February Form was also stamped with a medallion signature guarantee issued by Norman Eaker, CEO of Edwards Jones, although Eaker was not present to witness John Sr. sign the Form. Edward Jones transmitted the February Form to Farmers. Farmers then canceled the Stock held by John Sr. and John Jr. and transferred all 181.619 shares to Smith-Cote. The Stock Certificate cancellation and reissue date was February 3, 2011. The February Form Farmers accepted had been altered from the form Farmers originally provided to Smith-Cote.

         ¶9 In November 2012, John Jr. requested records from Farmers related to the Stock. John Jr. learned of the Stock transfer to Smith-Cote when Farmers responded in December 2012. Farmers determined that it had erred in transferring all 181.619 shares to Smith-Cote, declaring that it should have only transferred half the Stock. On December 21, 2012, Farmers requested that Smith-Cote return the Stock Certificate, which she did on June 24, 2014.

         ¶10 On February 28, 2013, John Jr. and the Cote family initiated litigation against Smith-Cote. See In re Estate of Cote, ¶ 4. On June 30, 2014, John Jr. and the Cotes filed an Amended Petition, alleging claims of undue influence and lack of capacity, conversion, fraud, and unjust enrichment against Smith-Cote regarding the Stock transfer. In re Estate of Cote, ¶ 4. The Amended Petition also stated claims against Farmers for negligent violation of fiduciary duties and conversion. On March 28, 2014, Farmers wrote to John Jr. and advised him that in exchange for a release of liability, Farmers would issue John Jr. a certificate for half of the Stock, or 90.8095 shares. John Jr. declined to sign a release, and Farmers did not issue a stock certificate. Farmers answered with a counterclaim and cross-claim for interpleader against John Jr. John Jr. responded and reiterated his claims against Farmers, alleging breach of the duty of care owed to a stockholder, breach of the fiduciary duty owed to a stockholder, breach of the duty of good faith and fair dealing, and requesting punitive damages. Around August 14, 2015, Farmers filed a motion for summary judgment, arguing that Smith-Cote and John Jr. each owned equal shares of the 181.619 shares of Farmers' Stock as tenants in common.

         ¶11 The District Court conducted two bench trials: on August 31-September 1, 2015, and on April 19-20, 2016. On April 11, 2016, the District Court granted John Jr.'s motion for partial summary judgment against Smith-Cote and Farmers. The District Court held that John Jr. is the sole owner of all 181.619 shares of Stock because Farmers did not transfer the Stock to Smith-Cote until after John, Sr.'s death. The District Court found there was no genuine dispute as to the following material facts: (1) John Jr. did not provide his consent to transfer all shares of the jointly held Farmers' Stock at issue to Smith-Cote; (2) the medallion signature guarantee, which was a requirement on Farmers' own form, was not provided until sometime after February 7, 2011, regardless of when the stamp was affixed; (3) the February Form was not transmitted to Farmers in order to effectuate the transfer until sometime after John Sr.'s death; and (4) Farmers' admission that it erred is an additional ground showing that the attempted transfer is invalid in its entirety. On March 2, 2017, Farmers represented to the District Court that it paid the remaining 2012-2016 dividends on the Stock and has now paid all the dividends on the 181.619 shares of Stock to John Jr., together with interest.

         ¶12 On March 16, 2017, the District Court issued an order requiring Farmers to pay John Jr. (1) any and all outstanding dividends with ten percent interest that has not already been paid on the 181.619 shares of Stock, including any dividends distributed to stockholders between February 3, 2011 and the order date; (2) $1.1 million in punitive damages to John Jr.; and (3) John Jr.'s costs in pursuing recovery of the Stock. Farmers filed a motion to vacate or reduce the award of punitive damages. The District Court denied Farmers' motion. Farmers appeals.

         STANDARDS OF REVIEW

         ¶13 This Court reviews a district court's conclusions of law de novo for correctness. Folsom v. Mont. Pub. Emps. Ass'n, 2017 MT 204, ¶ 18, 388 Mont. 307, 400 P.3d 706; Giambra v. Kelsey, 2007 MT 158, ¶ 28, 338 Mont. 19, 162 P.3d 134. A district court's interpretation and application of statutes presents a question of law. See Kulstad v. Maniaci, 2009 MT 326, ¶ 50, 352 Mont. 513, 220 P.3d 595. We review a district court's decision to award punitive damages for an abuse of discretion. Osman v. Cavalier, 2011 MT 60, ¶ 7, 360 Mont. 17, 251 P.3d 686. We review a district court's findings under the statute setting out requirements for awards of punitive damages, § 27-1-221, MCA, to determine whether the findings are clearly erroneous. Marie Deonier & Assocs. v. Paul Revere Life Ins. Co., 2004 MT 297, ¶ 39, 323 Mont. 387, 101 P.3d 742. "A district court's findings are clearly erroneous if they are not supported by substantial credible evidence, if the [district] court misapprehended the effect of the evidence, or if a review of the record leaves this Court with the definite and firm conviction that a mistake has been committed." Beaver v. Mont. Dep't of Nat. Res. & Conserv., 2003 MT 287, ¶ 79, 318 Mont. 35, 78 P.3d 857; Marie Deonier & Assocs., 39. This Court's review of a district court's application of §§ 27-1-220, -221, MCA, is plenary. Osman, ¶ 7. This Court reviews de novo the constitutionality of punitive damages awards. McCulley v. U.S. Bank of Mont., 2015 MT 100, ¶ 20, 378 Mont. 462, 347 P.3d 247 (citing Seltzer v. Morton, 2007 MT 62, ¶ 152, 336 Mont. 225, 154 P.3d 561).

         DISCUSSION

         ¶14 Issue One: Whether the District Court Order restoring John Cote, Jr.'s converted Stock constituted an award of compensatory damages for purposes of determining an award of punitive damages.

         ¶15 Compensatory damages are designed to compensate the injured party for an actual loss or injury. Sunburst Sch. Dist. No. 2 v. Texaco, Inc., 2007 MT 183, ¶ 40, 338 Mont. 259, 165 P.3d 1079; Seltzer, ¶ 148; State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408, 416, 123 S.Ct. 1513, 1519 (2003) ("[c]ompensatory damages are intended to redress the concrete loss that the plaintiff has suffered by reason of the defendant's wrongful conduct. . . .") (internal citations omitted); Semenza v. Bowman, 268 Mont. 118, 126, 885 P.2d 451, 456 (1994); § 27-1-317, MCA; Restatement (Second) of Torts, § 903 cmt. a (Am. Law Inst. 1979) ("[w]hen there has been harm only to the pecuniary interests of a person, compensatory damages are designed to place him in a position substantially equivalent in a pecuniary way to that which he would have occupied had no tort been committed. . . ."). The "proper measure of compensatory damages must be determined solely based on the facts of each case." Seltzer, ¶ 96. By contrast, "punitive damages serve a broader function; they are aimed at deterrence and retribution." Campbell, 538 U.S. at 416, 123 S.Ct. at 1519.

         ¶16 A party may recover lost profits if the profits can be established with some certainty and proof of source. DeTienne v. Sandrock, 2018 MT 269, ¶¶ 14, 18, 393 Mont. 249, P.3d (citing § 27-1-317, MCA); Delaney & Co. v. City of Bozeman, 2009 MT 441, ¶¶ 41-42, 354 Mont. 181, 222 P.3d 618. Dividends are a portion of a company's profits distributed to shareholders in the form of money or additional shares. Dividends, Black's Law Dictionary (10th Ed. 2014). Here, the withheld dividends amount to lost profits and can be established with complete certainty of amount and source.

         ¶17 Interest as damages is includable in a judgment. Section 27-1-211, MCA ("[e]ach person who is entitled to recover damages certain or capable of being made certain by calculation and the right to recover which is vested in the person upon a particular day is entitled also to recover interest on the damages from that day . . . ."). Securities have an immediate "use" value, like money. Including interest in the calculation of damages reflects a defendant's use of a plaintiff's money (or securities) that must be included in a judgment to ensure a plaintiff is fully compensated. Byrne v. Terry, 228 Mont. 387, 391, 741 P.2d 1341, 1343 (1987) (citing § 27-1-211, MCA). As the Dissent correctly points out, the interest on the Stock was compensatory damages designed to compensate John Jr. for Farmers' wrongful detention of John Jr.'s money. Dissent, ¶ 62.

         ¶18 Under Montana's adopted version of the Uniform Commercial Code, "[a]n issuer that is liable for wrongful registration of transfer . . . on demand shall provide the person entitled to the security with a like certificated or uncertificated security, and any payments or distributions that the person did not receive as a result of the wrongful registration." Section 30-8-414(2), MCA.

         ¶19 The District Court found that Farmers is an issuer and is liable for wrongful registration of the transfers of Stock to Smith-Cote. The District Court relied on a Delaware case applying a statute identical[4] to Montana's adopted provisions, § 30-8-414(2), MCA, and interpreting official comments that are consistent with Montana's official comments. The Delaware Court held that the "right to elect damages instead of the return of duplicate securities does not exist under ordinary circumstances . . . where the issuer acts with reasonable promptness." Tuggle v. Am. Fin. Sys., 1978 Del. Ch. LEXIS 659, at *7 (Del. Ch. June 22, 1978). However, "[t]he draftsmen's official comments to [§ 8-404] note that the case law has also recognized the right to elect between an equitable action to compel issue of a new security and an action for damages." Tuggle, 1978 Del. Ch. LEXIS at *6. Applying the Delaware Court's rationale, the District Court determined that Farmers did not act with "reasonable promptness." Despite Farmers' representations to the District Court and John Jr.'s repeated demands, it took Farmers nearly five years from the time Farmers admitted to John Jr. that it improperly transferred the Stock until it finally returned the Stock to John Jr. Thus, the District Court concluded Farmers was not entitled to the statutory protections or limitations on damages under § 30-8-414, MCA, and was obligated to make John Jr. whole. The District Court concluded John Jr. was entitled to compensatory damages in the form of the Farmers stock, interest, and dividends, and that Farmers was not entitled to the statutory limitation of remedies.

         ¶20 Farmers argues the remedy for wrongful registration of a security is not compensatory damages, and the District Court erred in awarding punitive damages to John Jr. Farmers contends that the proper remedy under § 30-8-414(2), MCA, is requiring the financial institution to reissue the security, along with any payments or distributions the aggrieved party did not receive as a result of the wrongful registration. Farmers argues it complied with the statute when it returned the Stock. John Jr. counters the District Court correctly identified the Stock, dividends, and interest as "compensatory damages" in the amount of at least $477, 846.85. We agree.

         ¶21 In pleadings and in the District Court's order regarding partial summary judgment, Farmers conceded it is an issuer and is liable for "wrongful registration of transfer" of the Stock to Smith-Cote. See § 30-8-414, MCA

         ¶22 When Farmers wrongfully transferred the Stock, John Jr. clearly suffered damages. Farmers refused John Jr.'s repeated demands for the return of all 181.619 shares of Stock. Nearly five years passed between when Farmers admitted to John Jr. that it improperly transferred John Jr.'s Stock to Smith-Cote and when Farmers represented to the District Court that it had paid all shares of Stock, plus interest and dividends, to John Jr. Farmers forced John Jr. to seek a judicial remedy to compel Farmers to return the other half of the Stock, plus interest and dividends. Throughout this period, John. Jr. was deprived of the use and value of his Stock.

         ¶23 Compensatory damages are designed to make a party whole, and a court should determine compensatory damages based on the facts of each case. Seltzer, ¶¶ 96, 148. Here, the Stock is equivalent to compensatory damages. See Campbell, 538 U.S. at 416, 123 S.Ct. at 1519. The Stock is fungible, transferrable, and with a redeemable, immediately liquid ascertainable cash value that serves as compensation for a pecuniary loss. See Seltzer, ¶ 148; Campbell, 538 U.S. at 416, 123 S.Ct. at 1519.

         ¶24 Unlike a court-ordered return of a unique piece of property, wrongful registration of a security under § 30-8-414(2), MCA, requires that the party who wrongfully registered the security provide the wronged party "with a like certificated or uncertificated security, and any payments or distributions that the person did not receive as a result of the wrongful registration." (Emphasis added.) The issuance of the Stock constituted an immediate restoration of monetary value to John Jr.: the value of the certificated Stock, plus accrued interest and dividends. The interest and dividends were necessary to fully restore John Jr. for his detriment suffered at the hands of Farmers. See §§ 27-1-201, -202, MCA. The Dissent contends that the issuance of the Stock is an equitable remedy and one not equivalent to, or interchangeable with, compensatory damages. Dissent, ¶¶ 47-49. However, we have consistently held that "the purpose of compensatory damages . . . is to redress the concrete loss that a plaintiff has suffered by reason of a defendant's wrongful conduct." Seltzer, ¶ 148 (citing Campbell, 538 U.S. at 416, 123 S.Ct. at 1519). That is precisely what occurred in this case. John Jr. suffered a concrete loss by reason of Farmers' wrongful conduct. The District Court redressed Farmers' wrongful conduct by requiring Farmers to issue a like security, along with payment for the ancillary pecuniary loss John Jr. suffered as a result. Based on the contemporaneous value of the Stock, the parties and the District Court were able to calculate to the penny John. Jr.'s concrete losses. Further, on the day John Jr. received the Stock certificates, he could have immediately converted the Stock to cash, no different than he could have deposited a check for the damages he suffered. If something "looks like a duck, walks like a duck and quacks like a duck, it must be a duck." Wild v. Fregein Constr., 2003 MT 115, ¶ 31, 315 Mont. 425, 68 P.3d 855. In both form and substance, the District Court's award in this case was a duck.

         ¶25 The Dissent points to a comment to § 30-8-414, MCA, that, historically, when an issuer wrongfully registered a security transfer, some courts allowed the registered owner to elect between the issuance of new stock and a claim for monetary damages, which § 30-8-414, MCA, does not provide. Dissent, ¶ 49. The Dissent then makes the unsupported leap that the elimination of an election of remedies means that the statutorily prescribed remedy is necessarily an equitable one. Dissent, ¶ 49. Since both remedies were designed to redress the concrete loss suffered by the wronged party, however, the elimination of one remedy is less proof of an intent to constrain the redress obtained, and more a recognition that the remedies are just two ducks of a different color.

         ¶26 Finally, during the April 19-20, 2016 bench trial and in its September 2016 proposed Supplemental Findings of Fact and Conclusions of Law, Farmers framed the dispute over the return of Stock as "damages" and called its March 2014 offer to return half the Stock a way for John Jr. to "mitigate [his] damages." Farmers points out that its mitigation argument was in refence to the financial pressure John Jr. felt relating to litigation costs, [5]the fact that potential acceptance of half the Stock at an earlier stage in the proceeding could have been used to solve John Jr.'s financial concerns goes to Farmers' treatment of the Stock as monetary damages.

         ¶27 The District Court did not err when it concluded John Jr. was entitled to the compensatory damages in the form of all the shares of Farmers' Stock, plus appropriate dividends and interest. See Kulstad, ¶ 50; Giambra, ¶ 28. This award of compensatory damages thus enabled the District Court to consider punitive damages against Farmers. See Folsom, ¶ 51 ("punitive damages are not available as a matter of law absent an award of compensatory damages on a predicate cause of action from which the actual malice or actual fraud arose. . . .").

         ¶28 Issue Two: Whether the District Court erred by finding that Farmers was subject to punitive damages because it acted with actual malice.

         ¶29 It should be presumed that a plaintiff "has been made whole for his injuries by compensatory damages, so punitive damages should only be awarded if the defendant's culpability . . . is so reprehensible as to warrant the imposition of further sanctions to achieve punishment or deterrence." Campbell, 538 U.S. at 419, 123 S.Ct. at 1521; Seltzer, ¶ 134 (the purpose of punitive damages "is to have an impact on the defendant in the form of punishment and deterrence. . . . ").

         ¶30 "[R]easonable punitive damages may be awarded when the defendant has been found guilty of actual fraud or actual malice." Section 27-1-221(1), MCA. Actual malice exists where a defendant

has knowledge of facts or intentionally disregards facts that create a high probability of injury to the plaintiff and:
(a) deliberately proceeds to act in conscious or intentional disregard of the high probability of injury to the plaintiff; or
(b) deliberately proceeds to act with indifference to the high probability of injury to the plaintiff.

         Section 27-1-221(2), MCA. When assessing an award for punitive damages, the district court "shall clearly state the reasons for making the award in findings of fact and conclusions of law, demonstrating consideration of each of the following matters":

(i) the nature and reprehensibility of the defendant's wrongdoing;
(ii) the extent of the defendant's wrongdoing;
(iii) the intent of the defendant in committing ...

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