IN THE MATTER OF THE ESTATE OF: JOHN P. COTE, SR., Deceased,
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
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
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
Appellees: Robert Terrazas, Dana A. Henkel, Jesse Froehling,
Terrazas Clark Henkel, P.C., Missoula, Montana
JEREMIAH SHEA JUDGE
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.
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
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
AND FACTUAL BACKGROUND
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. 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.
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."
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. . . .
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. 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.
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
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.
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.
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.
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.
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
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
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.
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.
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.
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.
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 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.
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.
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
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.
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
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.
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.
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,
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
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. . . .").
Issue Two: Whether the District Court erred by finding
that Farmers was subject to punitive damages because
it acted with actual malice.
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. . . . ").
"[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;
(b) deliberately proceeds to act with indifference to the
high probability of injury to the plaintiff.
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
(ii) the extent of the defendant's wrongdoing;
(iii) the intent of the defendant in committing ...