Tidyman's Mgmt. Servs. Inc. v. Davis

376 Mont. 80

330 P.3d 1139

TIDYMAN'S MANAGEMENT SERVICES INC., a Washington corporation; Lenora Davis Bateman, Vicki Earhart, Carol Heald, Theresa Youngquist, Barbara Gaustad, Sharon Young, Diane Moles, Kyle Bailey, Mark Rademan, Drew Olsen, Chadney Sawyer, Thomas Nagrone, Dan Nagrone, Darrell Naccarato, Pat Dahmen, Janelle Sells, Terri Orton, William Evanson, Bill Evanson, Tammy Evanson, Larry Thompson, Jason Guice, Jamie Guice, Laura Squibb, Rick Baillie, Jeffrey Tucker, Amy Tucker, Marybeth Wetsch, Laura Stockton, Jerry Streeter, Clara Kuhn, Nancy McDonald, Ted Nuxoll, Cindy Nuxoll and Dean Carlson, individuals, Plaintiffs, Appellees, and Cross–Appellants,

v. Michael A. DAVIS; John Maxwell; Defendants and Appellees,National Union Fire Insurance Company of Pittsburgh, PA; and John Does 1–10, Defendant and Appellant.

No. DA 13–0228.

Supreme Court of Montana.

Submitted on Briefs April 23, 2014.

Decided Aug. 1, 2014.

For Appellant: James H. Goetz, Goetz, Baldwin & Geddes, P.C., Bozeman, Montana; Robert F. James, Gary M. Zadick, Mary K. Jaraczeski, Ugrin, Alexander, Zadick & Higgins, P.C., Great Falls, Montana; Allan H. Baris, Moore, O'Connell & Refling, Bozeman, Montana; Timothy R. MacDonald, Edwin P. Aro, Arnold & Porter, LLP, Denver, Colorado (Attorneys for National Union Fire Insurance Company of Pittsburgh, PA).

For Appellees: John L. Amsden, Monte D. Beck and Anthony F. Jackson, Beck & Amsden, PLLC, Bozeman, Montana; G. Patrick Hagestad, Perry J. Schneider, Milodragovich, Dale & Steinbrenner, PC, Missoula, Montana (Attorneys for Individual Plaintiffs, Appellees and Cross–Appellants), Gregory S. Munro, Attorney at Law, Missoula, Montana; William W. Leaphart, Attorney at Law, Helena, Montana (Co-counsel for Appellees and Cross–Appellants), Michael G. Black, Black Law Office, Clinton, Montana (Attorney for Tidyman's Management Services), James B. King, Evans, Craven & Lackie, P.S., Spokane, Washington; Kathleen L. DeSoto, Garlington, Lohn & Robinson, PLLP, Missoula, Montana (Attorneys for Michael A. Davis), James A. McPhee, Workland & Witherspoon, PLLC, Spokane, Washington; Dean A. Hoistad, Hoistad Law Firm, PLLC, Missoula, Montana (Attorneys for John Maxwell).

For Amicus Curiae: Dale R. Cockrell, Moore, Cockrell, Goicoecha & Axelberg, P.C., Kalispell, Montana; Martha Sheehy, Sheehy Law Firm, Billings, Montana (Attorneys for Montana Defense Trial Lawyers Association), Guy W. Rogers and Jon A. Wilson, Brown Law Firm, P.C., Billings, Montana (Attorneys for National Association of Independent Insurance Adjusters), Amy Eddy, Eddy Sandler Trial Attorneys, PLLP, Kalispell, Montana, Terry Trieweiler, Trieweiler Law Firm, Whitefish, Montana (Attorneys for United Policyholders and the Montana Trial Lawyers Association).

Justice MICHAEL E. WHEAT delivered the Opinion of the Court.

¶ 1 National Union Fire Insurance Company of Pittsburgh, Pennsylvania (NUFI) appeals from the order of the Montana Fourth Judicial District Court, Missoula County, granting the plaintiffs' motion for summary judgment and motions to approve stipulations for entry of judgment and enter judgment accordingly. We affirm in part, reverse in part, and remand for proceedings consistent with this Opinion.

ISSUES

¶ 2 We address the following issues:

1. Did the District Court correctly conclude that Montana, rather than Washington, law applied in this case?

2. Did the District Court err in concluding that NUFI had breached its duty to defend without analyzing coverage under the policy?

3. Did the District Court err in denying NUFI a hearing and discovery on reasonableness and collusion related to the stipulated settlements?

4. Did the District Court err by awarding pre-judgment interest, or in its determination of when the interest began accruing?

FACTUAL AND PROCEDURAL BACKGROUND

¶ 3 On May 21, 2010, the plaintiffs and Tidyman's Management Services Inc. (TMSI) filed a complaint against Michael A. Davis (Davis) and John Maxwell (Maxwell) in their capacities as officers and directors of TMSI and/or its subsidiary, Tidyman's LLC. The complaint alleged breach of corporate duties arising out of a merger between TMSI and SuperValu, which created Tidyman's LLC, and requested punitive damages and attorney fees. The merger at issue occurred despite advice from a financial advisor TMSI had retained that the company should be sold, and the complaint alleged that the directors and officers, including Davis and Maxwell, had misrepresented the merit of the transaction. TMSI is a Washington corporation with its principal place of business in Montana, and is a member of Tidyman's LLC. Essentially, employee shareholders own TMSI.

¶ 4 On January 8, 2007, the plaintiffs had filed a complaint in federal court alleging violations of the Employee Retirement Income Security Act of 1974 (ERISA). They amended their complaint in December 2007 to include allegations against the officers and directors of TMSI for breach of corporate fiduciary duties. In the course of the federal litigation, the ERISA claims settled. The plaintiffs also settled their claims against the officers and directors of TMSI, except for those claims against Davis and Maxwell. During the federal court litigation, NUFI provided a defense to Davis and Maxwell through their respective counsel, James King (King) and James McPhee (McPhee). After the settlements, the federal district court dismissed the federal court action without prejudice after declining to exercise supplemental jurisdiction over the state law claims pursuant to 28 U.S.C. § 1367. See Nagrone v. Davis, No. CV–07–04–M–DWM–RKS, 2010 WL 1981224, 2010 U.S. Dist. LEXIS 47748 (D.Mont. Apr. 21, 2010); Nagrone v. Davis, No. CV 07–04–M–DWM–RKS, 2010 WL 1981575, 2010 U.S. Dist. LEXIS 47750 (D.Mont. May 14, 2010). The plaintiffs and TMSI then filed the instant action in state district court, alleging the same claims against Davis and Maxwell as were alleged in the federal litigation.

¶ 5 In 2006, NUFI issued a corporate liability insurance policy (Policy) to Tidyman's LLC and insured Davis and Maxwell against liability incurred in their positions as officers and directors of Tidyman's LLC. Pursuant to this Policy, NUFI provided a legal defense for Davis and Maxwell throughout the federal court litigation. When the plaintiffs filed in state court, they added TMSI as a plaintiff in their suit against Davis and Maxwell in their capacities as directors and officers of the LLC—of which TMSI was a member. On August 5, 2010, after the state court litigation had commenced, Jessica Lermond (Lermond), who worked for Chartis Claims, Inc. (Chartis), which managed claims on behalf of NUFI, sent a letter to counsel for Davis and Maxwell asserting that NUFI would no longer cover defense costs in the matter. She based the denial of coverage upon the “Insured v. Insured” exclusion set forth in Clause 4(i) as amended by Endorsement # 13 of the Policy, stating:

As set forth in Clause 4(i) of the Policy as amended [by] Endorsement 13, [NUFI] shall not be liable to make any payment for Loss which is brought by any Insured (other than an Employee, but solely with respect to a Securities Claim) or by the Company; or which is brought by any security holder of the Company, whether directly or derivatively, unless such security holder's Claim is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of any Insured....

...

Please note that based on the foregoing, it appears that the Complaint filed in on [sic] May 21, 2010, in the Montana Fourth Judicial District, County of Missoula does not implicate the Policy....

In the ensuing litigation, NUFI has conceded that Lermond's interpretation incorporated a flawed understanding of the corporate structure.

¶ 6 After Davis and Maxwell received this letter, on August 12, 2010, the plaintiffs and TMSI amended their complaint to add NUFI as a defendant. The plaintiffs and TMSI alleged that until Lermond's August 5, 2010, letter, NUFI had provided a defense under the Policy to Davis and Maxwell. In addition to their previous claims, the plaintiffs and TMSI also sought a declaratory judgment that the liability asserted against Davis and Maxwell was covered under the Policy.

¶ 7 On September 2, 2010, Davis's counsel, King, sent a letter to Lermond inquiring as to whether NUFI would continue to pay defense costs for the action, so he could advise his client about his options:

Please advise whether the carrier is going to continue to pay for the costs of defense of this matter through and including trial and to include reasonable attorney's fees, expert expenses, etc. Your letter states that there is no coverage but you left a voice mail about paying for “a Motion to Dismiss.”

¶ 8 When Lermond failed to respond, King sent a follow up letter on September 20, 2010: “This will serve as a follow up to my September 2nd correspondence to your [sic] regarding this matter. I would appreciate an answer to the question posed forthwith.” On September 23, 2010, NUFI filed a motion to dismiss for lack of coverage. While that motion was pending, Lermond failed to respond “forthwith” and, on October 26, 2010, Maxwell's counsel, McPhee, was obliged to send a third letter on behalf of himself and King, again requesting a response as to whether the insurer would pay defense costs. On October 28, 2010, counsel for Chartis contacted McPhee explaining:

In Ms. Lermond's letter to you she advised that “[b]ased on the Complaint filed on May 21, 2010, there is no longer any coverage for this matter under the Policy.” Accordingly, since there is no coverage, National Union is not going to continue to pay the costs of defense of this matter.

The same day, King received a letter from Lermond containing the same language. Both letters invited the counsel to submit documentation or other information that might show NUFI's coverage position was in error.

¶ 9...