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Abbey/Land, LLC v. Glacier Construction Partners, LLC

Supreme Court of Montana

January 29, 2019

ABBEY/LAND, LLC, a Montana limited liability company, Plaintiff, Appellee, and Cross-Appellant,
v.
GLACIER CONSTRUCTION PARTNERS, LLC, a Montana limited liability company, Defendant, Appellee, and Cross-Appellant, and JAMES RIVER INSURANCE COMPANY, Intervenor and Appellant.

          Submitted on Briefs: October 10, 2018

          APPEAL FROM: District Court of the Eleventh Judicial District, In and For the County of Flathead, Cause No. DV-09-1198A Honorable Amy Eddy, Presiding Judge

          For Appellant James River Insurance Company: Robert K. Baldwin, Benjamin J. Alke, James H. Goetz, Goetz, Baldwin and Geddes, P.C., Bozeman, Montana

          For Appellee Abbey/Land, LLC: David Berkoff, Berkoff Law Firm, P.C., Missoula, Montana For Appellee Glacier Construction Partners, LLC: Mark D. Parker, Parker, Heitz and Cosgrove, PLLC, Billings, Montana

          OPINION

          Beth Baker, Justice

         ¶1 In Abbey/Land LLC v. Interstate Mechanical, Inc., 2015 MT 77, 378 Mont. 372, 345 P.3d 1032');">345 P.3d 1032 [hereinafter Abbey/Land I], we reversed and remanded the District Court's $12 million stipulated judgment against Glacier Construction Partners, LLC ("Glacier") in favor of Abbey/Land LLC ("Abbey/Land"). We remanded with instructions for the District Court to grant James River Insurance Company's ("James River") request to intervene to challenge the reasonableness of the confessed judgment and whether it was the product of collusion.

         ¶2 After discovery and a hearing on remand, the court determined that the confessed judgment was the product of collusion and was unreasonable. The court reduced the judgment to approximately $2.4 million and ordered Abbey/Land and Glacier to pay James River's attorney fees and costs associated with the proceedings. James River appeals, and Abbey/Land and Glacier each cross-appeal. We address whether the District Court erred when it:

1. Found the $12 million confessed judgment unreasonable; and
2. Held that the settlement was the product of collusion. Based on our analysis of these issues, we further address whether the District Court:
3. Fashioned a proper remedy by opting to reduce the settlement amount, rather than dismissing the action; and
4. Properly awarded attorney fees and costs to James River.

         ¶3 We affirm the District Court's findings that the confessed judgment was unreasonable and the product of collusion. On the basis of those findings, we reverse and remand the District Court's amended judgment with instructions to dismiss Abbey/Land's claim with prejudice. We affirm the District Court's decision to grant attorney fees, although on different grounds. We reverse and remand the attorney fee award for the District Court to reduce the award. Finally, we affirm the District Court's decision to award costs, but reverse and remand for the District Court to recalculate the award to include only costs allowable under § 25-10-201, MCA.

         PROCEDURAL AND FACTUAL BACKGROUND

         ¶4 This case, on appeal to the Court for a second time, is one of several actions in at least two counties and two United States district courts, as well as an arbitration proceeding, arising from the construction of a massive luxury home on Shelter Island, a small island in Flathead Lake, Montana. The instant action was originally filed in September 2009 over construction defects and associated problems.

         ¶5 Real estate developer Donald G. Abbey formed Abbey/Land in 2000 to purchase Shelter Island and related shoreline properties. Abbey/Land began to build a large residence on Shelter Island in 2001. After problems with the original contractor, Abbey formed Glacier to act as a new general contractor for the project. The construction on Shelter Island was Glacier's only project. Abbey is the sole owner, manager, and member of both Abbey/Land and Glacier.

         ¶6 On May 1, 2006, Abbey/Land and Glacier entered into a general contract for the construction of the Shelter Island residence. Abbey signed on behalf of both parties. The contract included an arbitration provision, limited the prevailing party's damages to actual damages, and specifically precluded any recovery of consequential damages. Under the contract, Glacier was reimbursed for the cost of all work it performed, including the cost of correcting defective work, but did not earn any profit. The District Court found that Glacier served more as a construction agent for Abbey/Land than as an independent, at-risk general contractor.

         ¶7 Glacier subcontracted with Interstate Mechanical, Inc. ("Interstate") for the design and installation of the plumbing and heating-cooling systems for the house. Subsequent change orders increased the value of Interstate's original $1.4 million contract by approximately $1 million. Neither Abbey, Abbey/Land, nor Glacier employed an architect to oversee the changes to the project. Interstate initiated arbitration proceedings in 2009, alleging $806, 917.95 in damages arising from Glacier's breach of contract, violations of the Montana Prompt Payment Act, unjust enrichment, constructive fraud, and negligence. Glacier counterclaimed against Interstate for $1, 608, 644.26 in damages due to Interstate's alleged faulty work that Glacier alleged caused damage to the Shelter Island residence and property. Glacier eventually terminated Interstate from the project.

         ¶8 Abbey/Land and Glacier filed the instant action in Flathead County on September 23, 2009-the day before the scheduled preliminary hearing in the arbitration action. Abbey/Land and Glacier brought claims against Interstate and other subcontractors, seeking compensatory and punitive damages caused by a pipe rupture in October 2008 that flooded the basement with an uncontrolled loss of water. The flooding water over-saturated the septic system drain field, which in turn contaminated the water well with E-coli bacteria. In addition, Abbey/Land claimed Interstate's deficient work caused various other damages, including leaks caused by frozen pipes, heat pumps that did not operate within the permit limits set by the Department of Environmental Quality, and a water treatment system that caused tons of salt and other contaminants to be deposited into the drain field. Abbey/Land and Glacier requested that the arbitration be stayed so they could recover consequential and punitive damages against Interstate in the state court action.

         ¶9 In response, Interstate sued in the United States District Court for the District of Montana to compel arbitration. The federal court ordered Glacier to arbitrate its dispute with Interstate and stayed the action in state court. On October 11, 2010, after the federal court compelled arbitration, Glacier made the first tender to its comprehensive general liability insurer James River to provide a defense. At that time Glacier was aligned as a plaintiff in this suit. Glacier represented to James River that damages were likely to be in the $1-2 million range. James River denied coverage.

         ¶10 In January 2011, the arbitrator awarded Glacier $414, 021.11 in damages from Interstate. The arbitrator determined that some of Glacier's claims were not for damages but for betterments, and he refused to make an award for those claims. The arbitrator also found "fault with Glacier in the way this Project was managed and administered," citing Abbey's and Glacier's failure to have "an architect to administer the Project, update schedules, respond to questions regarding ongoing coordination and design issues, and to deal with ongoing changes."

         ¶11 Immediately after the arbitration award, Abbey took actions to shut down Glacier's operations and transfer all of the company's assets to Abbey/Land and another one of Abbey's companies. Glacier received no compensation for these transfers. Internal e-mails show that the scheduled "shut-down" date for Glacier was February 15, 2011. After Glacier's shutdown and transfer of all assets, Abbey/Land made a written demand against Glacier for the total amount of the arbitration award. Abbey/Land wrote that it had "suffered property damages in a total amount that has yet to be determined and property damages from loss of use will be substantial." It explained that the amount of the arbitration award "is clearly owed to Abbey/Land LLC now, and any payment will be offset against the total amount of property damages ultimately awarded to Abbey/Land LLC from Interstate Mechanical, Inc. and/or Glacier Construction Partners, LLC."

         ¶12 Shortly after receiving this demand from Abbey/Land, Glacier voluntarily dismissed its claims against all the defendants in this action in April 2011. Abbey/Land's Rule 30(b)(6) designee, William Matteson, testified that also during this time Abbey/Land and Glacier signed an amendment to their general contract. The amendment eliminated the arbitration requirement and removed the prohibition against any award of consequential or punitive damages. The amendment stated that it was "entered into as of June 9, 2009," but counsel who represented Glacier in 2012 appeared not to be aware of the modification, and the amendment did not surface in this litigation until 2013. The District Court found that even if the amendment was executed in April 2011, "[i]t was not in [Glacier's] interest to amend the General Contract to remove significant contractual protections" at that time, because Abbey/Land already had made demands against Glacier.

         ¶13 Abbey/Land filed its second amended complaint on September 23, 2011, naming Glacier as a defendant. Abbey/Land alleged that the defendants collectively had been negligent. The second amended complaint contained no specific allegations against Glacier; rather, all of Abbey/Land's claims against Glacier were pass-through claims against the subcontractors. Four days after Abbey/Land filed the second amended complaint, attorney George Best filed a notice of appearance for Glacier and a motion to admit Jon E. Cushman pro hac vice on behalf of Glacier.

         ¶14 Glacier renewed its tender for defense to James River on October 5, 2011. James River again denied coverage, citing its prior denial. Other insurers provided Glacier with a defense under reservation of rights and appointed James Cumming to defend Glacier in 2012.[1] While he was defending Glacier, Cumming planned to file a motion to compel arbitration and retained construction expert Mike Herbst. Herbst opined that the drain field was never designed to handle the large waterflow from the residence, such as the twenty-five-gallon-per-minute shower heads, and that Glacier would not be liable for the improperly designed drain field. In a May 2012 e-mail, Cushman instructed Cumming not to disclose Herbst or his opinion to anyone. Shortly after, Cushman insisted the insurance company terminate Cumming. The District Court found that after Cumming's termination, there is no evidence of any effort to mount a defense on behalf of Glacier. Glacier did not issue any discovery to Abbey/Land or depose anyone from Abbey/Land regarding Abbey/Land's damages.

         ¶15 Cushman filed Glacier's answer on May 7, 2012, admitting nearly all the Complaint's factual allegations and cross-claiming against the other defendants. The only affirmative defense that Glacier raised was that all of Abbey/Land's damages were caused by the conduct of others. It did not raise any affirmative defense about Abbey/Land's comparative negligence, Abbey/Land's duty to mitigate damages, or the enforceability of the arbitration provision. The District Court found that, although Glacier had switched from a plaintiff to a defendant, its legal position had not changed.

         ¶16 E-mails between Abbey and his various attorneys from 2012 through 2013 reveal extensive attempts to coordinate the litigation strategy between Abbey/Land and Glacier. The e-mails demonstrate that Abbey treated the lawyers for the two companies as one unit. For instance, in April and May 2012, Glacier's attorney Cushman contacted Terry Trieweiler on behalf of Abbey/Land and Abbey to request that Trieweiler appear for Abbey/Land against Glacier. He explained to Trieweiler that Abbey/Land's prior attorneys had to withdraw after the case was realigned, because they had represented both Abbey/Land and Glacier before the realignment and the realignment created a conflict. He told Trieweiler that "the table is properly set for a healthy recovery" and that the case "has many zeros behind it."

         ¶17 Trieweiler agreed to represent Abbey/Land on May 21, 2012, and Cushman immediately organized a meeting in Rollins, Montana, for later that month between counsel for Abbey/Land and Glacier, people knowledgeable about the project, and Paul Pederson- Cushman's recommended damages expert for Abbey/Land. Cushman e-mailed the attorneys for Glacier and Abbey/Land before that meeting asking for a joint prosecution agreement to create a blanket attorney-client privilege between Abbey, Abbey/Land, and Glacier. He assured the other attorneys that the common interest criteria for a blanket attorney-client privilege could be met and explained, "When we meet I do not want us to have to act like adversaries. This is not collusion, it is simply recognition that the facts and the law drive this case in one direction: pass through." Abbey/Land and Glacier later relied on this common interest theory to deny discovery requests from one of the defendant subcontractors.

         ¶18 Most of the participants at the Rollins meeting were Glacier representatives and legal counsel. Pederson did not know on whose behalf he attended; he knew that he was "there to create a claim for damages." After Pederson sent his preliminary calculations to Trieweiler, Cushman reached out to Pederson directly to opine that Pederson's calculation was missing increased future electrical costs. At Cushman's request, Pederson included an additional $767, 000 in increased electrical costs in his damages report for Abbey/Land. Pederson's calculation of Abbey/Land's damages, which-with accumulated interest-approached $17 million by June 2013, is based on assumptions provided primarily by Glacier and its counsel. Pederson divided these damages into four categories: (1) direct cost damages of $1, 245, 301; (2) future costs to be incurred of $1, 186, 709; (3) loss of saleable lot of $3, 750, 000; and (4) loss of use of Shelter Island of $8, 430, 000.

         ¶19 Other than the increased future electrical costs, the direct and future cost calculations were primarily the same damages Glacier claimed in arbitration against Interstate. The $3.75 million loss-of-saleable-lot claim arose from the alleged loss of the ability to sell a developable parcel on the island because the drain field would need to be expanded onto the lot. Abbey/Land, however, did not own the alleged affected parcel; at the time, it was held by a separate Abbey company. The damage figure for the lot was not based on the fair market value of the property, but on a pro rata share of the development costs invested into the Shelter Island complex to that date. There was no evidence in the record of the lot's fair market value or of whether the drain field actually needed to be replaced or expanded onto the lot. Finally, Pederson calculated the loss of use damages based on a hypothetical $281, 000-per-month cost to rent a comparable property. ¶20 These calculations from Pederson were the only evidence of damages approaching the $12 million figure that Abbey/Land and Glacier developed prior to the confessed judgment. In fact, on March 22, 2013-about six weeks before Glacier signed the $12 million stipulation-Cushman wrote to Abbey to complain that Trieweiler had not lined up experts to prove the nature and extent of Abbey/Land's damages. Cushman acknowledged that Abbey/Land bore the burden of proof and explained that Abbey/Land "has done absolutely nothing to develop the case in Flathead."

         ¶21 It was counsel for Glacier who filed Pederson's declaration and damages calculation with the District Court in August 2012. The declaration was signed on letterhead for Glacier's counsel a week before Abbey/Land made a formal demand against Glacier for that amount. In the declaration, Pederson stated that Abbey/Land had retained him. After Abbey/Land made its formal demand on Glacier in August 2012, Cushman made the same demand against the other defendants and their insurers.

         ¶22 E-mails in August 2012 also show that Cushman directed Trieweiler on the parties' joint trial strategy, telling Trieweiler to amend Abbey/Land's complaint, to bring a motion for summary judgment, and that the companies could seek stipulated judgments in the meantime. In another August e-mail, Cushman wrote to counsel for both companies to discuss "an onslaught of motions being ginned up in the opposing camp" in both the Lake County and Flathead County proceedings[2], and requesting "a little more coordination amongst us." In September 2012, Cushman again e-mailed attorneys for Abbey/Land and Glacier, notifying them that Abbey wished to minimize his out-of-pocket attorney fees and that work should be performed whenever possible by attorneys being paid by the insurance companies or working on a contingency fee. He stated that this would require "close coordination" and nominated Trieweiler to "quarterback" the efforts. Abbey replied to the e-mail, asking how much of Cushman's billing was work for Abbey/Land that Trieweiler should be doing and requesting a weekly status call so the attorneys for the two companies could "understand what we are doing as a team." Less than a week after nominating Trieweiler as the "quarterback," Cushman warned that counsel for the insurance companies in the Lake County proceedings planned to challenge any assertion of privilege ...


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