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Inc. v. Junkermier

Supreme Court of Montana

April 24, 2019

DRAGGIN' Y CATTLE COMPANY, INC.; and ROGER and CARRIE PETERS, Plaintiffs and Appellees,
v.
JUNKERMIER, CLARK, CAMPANELLA, STEVENS, P.C., Defendants and Appellees, NEW YORK MARINE AND GENERAL INSURANCE COMPANY, Intervenor and Appellant.

          Argued: November 14, 2018

          Submitted: November 20, 2019

          District Court of the Eighteenth Judicial District, In and For the County of Gallatin, Cause No. DV-11-87AX Honorable Amy Eddy, Presiding Judge

          For Appellant: Gary M. Zadick (argued), Ugrin, Alexander, Zadick, P.C., Great Falls, Montana

          For Appellees: Timothy B. Strauch (argued), Strauch Law Firm, PLLC, Missoula, Montana David R. Paoli, Paoli Law Firm, P.C., Missoula, Montana

          For Amicus Montana Trial Lawyers Association: Justin P. Stalpes, Beck, Amsden & Stalpes, PLLC, Bozeman, Montana Gregory Munro (argued), Attorney at Law, Missoula, Montana

          BETH BAKER JUSTICE.

         ¶1 This case arises from a stipulated settlement entered into by Roger and Carrie Peters and Draggin' Y Cattle Company, Inc. (collectively, "Plaintiffs") with Junkermier, Clark, Campanella, Stevens, P.C. ("Junkermier"). Junkermier's liablity insurer, New York Marine and General Insurance Company ("New York Marine"), intervened to challenge the reasonableness of the settlement. After allowing limited discovery and holding a reasonableness hearing, the Eighteenth Judicial District Court, Gallatin County, determined that the stipulated settlement was reasonable and entered judgment against Junkermier. New York Marine appeals.

         ¶2 On appeal, we address whether the District Court properly found the settlement agreement reasonable when the insurer provided a defense under a reservation of rights throughout the relevant proceedings, but did not confirm coverage under the policy or file a declaratory action to determine coverage, declined to settle with Plaintiffs for policy limits, and misrepresented the policy limits. We hold on the facts of this case that the District Court improperly held that the stipulated agreement was reasonable. We reverse and remand for further proceedings consistent with this Opinion.

         PROCEDURAL AND FACTUAL BACKGROUND

         ¶3 This is the fourth time this case has come before this Court on appeal.[1] We restate the facts applicable to the issues in this appeal.

         ¶4 Roger and Carrie Peters, husband and wife, own Draggin' Y Cattle Company, formerly Alaska Basin Grazing Association. The Peterses have been ranching in Montana since the 1970s. The Peterses were longtime clients of Junkermier, working directly with Larry Addink for accounting services both for themselves and for their various businesses related to their ranching and cattle operations.

         ¶5 In 2004, Addink advised Plaintiffs that they could structure a sale of real property to their advantage as a tax-deferred exchange pursuant to Internal Revenue Code § 1031. Addink's plan involved selling real estate owned by Alaska Basin and using those proceeds to buy other real estate owned personally by the Peterses. Attorney Max Hansen drafted the closing documents for the transaction. Hansen expressed concern to Roger Peters that the transaction would not qualify for tax deferment under § 1031 because the parties to the exchange were related-the property being purchased to replace the Alaska Basin property was owned by the principals of Alaska Basin. He wrote a letter to Addink expressing these concerns, but explained that he had not provided Plaintiffs with tax advice about the proposed exchange. He wrote that he was leaving tax advice about the transaction to Junkermier because it had structured the deal. The property sales involved in the transaction closed in January 2007.

         ¶6 In November 2007, Addink learned that, pursuant to a 2002 revenue ruling, the type of transaction he had structured for Plaintiffs was prohibited from qualifying for treatment as a § 1031 exchange by the related-party rule. Addink informed Junkermier of his discovery and Junkermier notified New York Marine of the possible claim against it. Junkermier did not inform Plaintiffs that the transaction would fail to qualify under § 1031 until February 6, 2008. At the February 6 meeting, Junkermier told Plaintiffs that the transaction failed to qualify because of new tax rulings that had changed the law on related parties. Junkermier explained that, due to these recent rulings, the taxes on the transaction could not be deferred and an estimated $2.5 million would be due in state and federal taxes in three weeks. Between the time Addink realized his mistake and Junkermier disclosed the tax consequences to Plaintiffs, the Peterses had taken on additional debt and closed on a deal to purchase the Mountain View Ranch. Roger Peters testified that they would not have purchased Mountain View Ranch had they known about the tax liability. Plaintiffs' expert Robert Storey opined that the tax liability had a significant negative effect on Plaintiffs' ability to retain adequate financing and operating capital to support the ranching operations and real estate financing. He opined that inability to retain adequate financing forced Plaintiffs to dramatically scale back their operations, leading to lost profits close to $8 million.

         ¶7 Addink and Junkermier crafted a plan to mitigate the tax consequences by seeking an extension for Plaintiffs' 2007 tax filings, restructuring various entities in order to use losses to offset the gain, and negotiating with tax authorities to settle taxes, penalties, and interest due. Addink and Junkermier continued to provide accounting services to Plaintiffs until Plaintiffs terminated the firm in April 2009. Plaintiffs terminated Junkermier after Hansen-whom Plaintiffs had hired to negotiate a tax compromise with the IRS as part of the mitigation plan-told Plaintiffs that Junkermeier had misinformed them about the reason the transaction failed to qualify under § 1031.

         ¶8 New York Marine began providing Addink and Junkermier a defense as early as 2008 against potential claims Plaintiffs could bring. As part of these efforts, New York Marine hired Patrick HagEstad to defend Addink and Junkermier. Plaintiffs filed a complaint in January 2011 against Addink and Junkermier alleging professional negligence, breach of fiduciary duty, and breach of contract. Plaintiffs' first amended complaint, filed in February 2012, included additional allegations of breach of the implied covenant of good faith and fair dealing, misrepresentation, deceit, and constructive fraud, as well as a claim for punitive damages.

         ¶9 Shortly after the Peterses filed their first amended complaint, New York Marine issued a reservation of rights letter. New York Marine's letter disclaimed any coverage for fraud or punitive damages. Its final paragraph stated, "nothing herein or heretofore should be construed as an admission of coverage or liability by [New York Marine], or as a waiver, estoppel or modification of any of the terms, conditions or limitations of the [New York Marine] Policy and [New York Marine] reserves all rights, remedies and defenses, legal and equitable."

         ¶10 Throughout the litigation, HagEstad reported to Addink, Junkermier, and New York Marine that the case was defensible and that Plaintiffs most likely would recover less than $250, 000 if they succeeded in getting a verdict at trial. On June 10, 2014, Plaintiffs offered to settle all claims against Junkermier and Addink for the policy limits of $2 million in exchange for a full and final release of all claims. HagEstad advised the parties to seek independent counsel, because Plaintiffs' policy limits demand raised issues outside the scope of his representation.

         ¶11 Addink and Junkermier each retained independent counsel following the policy limits demand. Addink's independent counsel contacted HagEstad and informed him that Addink wanted the case settled within policy limits because Addink believed there was "significant risk" the verdict would be in excess of policy limits. Junkermier also sent a letter to New York Marine demanding that it settle the case within policy limits. HagEstad forwarded the policy limits demand to New York Marine on June 23, 2014, along with his assessment of the case. HagEstad maintained in his letter to New York Marine that he did not think the case was worth more than $250, 000. HagEstad explained his views that Plaintiffs were contributorily negligent, that the taxes were not recoverable as damages, and that other claimed damages were speculative. He conceded that if Plaintiffs succeeded on the outstanding legal issues, however, "the damages could be significantly closer to those stated by Plaintiffs in their demand letter." At the time of the policy limits demand, Roger and Carrie Peters, Hansen, and Plaintiffs' damages experts had not been deposed.

         ¶12 New York Marine, relying on HagEstad's counsel, authorized a counteroffer of $100, 000, which HagEstad offered to Plaintiffs on July 11, 2014. Plaintiffs did not respond to this counteroffer before the mediation scheduled for November 12, 2014. Shortly after New York Marine's rejection of the policy limits demand, Addink's personal counsel wrote to New York Marine requesting that it confirm that, because it had rejected the policy limits offer, it would be responsible for any excess verdict. New York Marine did not respond to the letter. Addink's counsel wrote to New York Marine again on August 20, 2014, to inform New York Marine that he would be prepared to enter into separate settlement negotiations with Plaintiffs at the court-ordered mediation to protect Addink's personal assets. New York Marine responded that it would not agree to pay any excess verdict and that if Addink entered into separate settlement with Plaintiffs without its consent Addink would be breaching the terms of the insurance contract. In early September, Junkermier's personal counsel wrote to New York Marine to encourage it to retain separate coverage counsel so that it could be properly advised as to its responsibility for any excess verdict under Montana law, having refused a policy limits demand which the insured wanted to accept.

         ¶13 Meanwhile, in July 2014, Plaintiffs filed their expert witness disclosure with a report from Robert Storey attached that outlined $12 million in damages, excluding emotional distress and punitive damages. After deposing Plaintiffs' damages experts, HagEstad filed motions for summary judgment on behalf of Junkermier raising issues regarding the statute of limitations, lost profits, emotional distress damages, breach of fiduciary duty and fraud claims, and tax liability damages. The District Court found that "resolution of these pending motions would have turned the value of the litigation in one direction or the other, and subjected the case to further appeal." A hearing was scheduled on these motions for November 14, 2014.

         ¶14 In October 2014, Plaintiffs reached out to Addink and Junkermier suggesting that the parties enter into a stipulated judgment and covenant not to execute, highlighting the $12 million in damages calculated by its experts, as well as the uncalculated emotional distress and punitive damage claims. In early November, shortly before the scheduled November 12 mediation, Plaintiffs again reached out to Addink and Junkermier to suggest that they enter into a stipulated settlement if the case was unable to settle. Plaintiffs wrote that stipulated settlements with covenants not to execute and assignments of rights are "a legitimate way for insureds to protect themselves from an excess judgment in circumstances where liability is reasonably clear and damages exceed policy limits." They further opined that an insurer's reservation of rights is "another reason that permits the defendants to enter into a stipulated judgment, assignment, and covenant not to execute." Junkermier forwarded the two letters from Plaintiffs to New York Marine and asked New York Marine to "accept responsibility for any failed negotiations" by "indemnify[ing] and hold[ing] harmless [Junkermier] from any excess verdict." None of the correspondence in the record from personal counsel to New York Marine challenged the reservation of rights letter or asked for confirmation of $2 million in coverage under the policy.

         ¶15 HagEstad wrote to New York Marine a week before the settlement conference that a reasonable settlement value for the case was between $100, 000 and $350, 000. After this letter from HagEstad, New York Marine responded to Junkermier on November 11, 2014, that its outstanding offer of $100, 000 was reasonable and that it "cannot agree to accept liability in excess of policy limits, which are eroded by defense expenses. New York Marine fully understands its duties and obligations to its insured under Montana law and has acted, and will continue to act, in accord with those obligations and in the best interests of its insured." The case failed to settle at the November 12 mediation.

         ¶16 Immediately following the failed mediation, Addink, Junkermier, and Plaintiffs entered into negotiations that produced a stipulated settlement for $10 million. The settlement acknowledged that New York Marine "has hired defense counsel to defend the defendants against the plaintiffs' claims." But, it continued, New York Marine's "refusal to settle by paying policy limits or, in the alternative, waive policy limits, is unreasonable and constitutes bad faith and a violation of Montana's Unfair Trade Practices Act because the defendants are needlessly being exposed to the substantial likelihood of a financially ruinous excess judgment." The agreement "ends the lawsuit through the entry of a stipulated judgment, that protects the defendants through a covenant not to execute [against Addink's or Junkermier's assets], and that permits the plaintiffs to enforce the stipulated judgment against [New York Marine] through an assignment." Addink, Junkermier, and Plaintiffs signed the agreement on November 13, 2014, the day before the scheduled hearing on the outstanding motions for summary judgment.[2] The settlement was contingent on the parties requesting "a hearing to approve the stipulated judgment as fair and reasonable." If the court did not approve the stipulated judgment, the case would proceed to trial. At the time that the parties entered into the settlement agreement, trial was three weeks away.

         ¶17 New York Marine moved to intervene in the case on December 8, 2014, to challenge the reasonableness of the stipulated settlement; the District Court granted intervention.[3] The District Court allowed limited discovery on the issue of reasonableness and held a reasonableness hearing on November 9, 2017.

         ¶18 In its Findings of Fact, Conclusions of Law and Order, the District Court acknowledged, "This is not a breach of the duty to defend case." It explained, however, that clear statutory directives under § 33-18-201(5) and (6), MCA, require insurers to affirm or deny coverage within a reasonable time and to settle a case in good faith. The District Court surmised that when an insurer fails to fulfill these requirements, "its abandonment of its insured is just as certain as if it has breached the duty to defend." Because it determined that New York Marine effectively had abandoned its insured, the District Court relied on Tidyman's Management Services Inc. v. Davis, 2014 MT 205, ¶ 41, 376 Mont. 80, 330 P.3d 1139 (Tidyman's I), to presume the pretrial settlement was reasonable and placed on the insurer the burden of proving the settlement was unreasonable. The District Court found the stipulated judgment in the amount of $10 million, in exchange for an assignment and covenant not to execute, was reasonable. It entered judgment of $10 million in favor of Plaintiffs against Junkermier.

         STANDARDS OF REVIEW

         ¶19 We review findings of fact for clear error and conclusions of law for correctness. Abbey/Land, LLC v. Glacier Constr. Partners, LLC, 2019 MT 19, ¶ 33, 394 Mont. 135, 433 P.3d 1230 (Abbey/Land II). We review de novo "a district court's decision about which legal standard to apply in assessing the reasonableness of a stipulated judgment." Tidyman's Mgmt. Servs. Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 2016 MT 201, ¶ 8, 384 Mont. 335, 378 P.3d 1182 (Tidyman's II).

         DISCUSSION

         ¶20 New York Marine argues on appeal that the District Court erred in finding that the stipulated agreement was reasonable and enforceable and improperly entered judgment on the agreement because New York Marine had defended its insureds throughout the litigation in question. It challenges the District Court's conclusions that it failed to affirm coverage and failed to settle in good faith and its holding that such failures are equivalent to abandoning its insureds. New York Marine maintains that a stipulated judgment entered into without the consent or participation of the insurer is proper only when an insurer has refused to ...


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