On January 29, 2019, the Supreme Court of Montana in Abbey/Land, LLC v. Glacier Construction Partners, LLC, --- P.3d ---, No. DA 17-0705, 2019 WL 350088 (Mont. Jan. 29, 2019), found a settlement and stipulated judgment both unreasonable and collusive, dismissing the insured’s action against its insurer, and awarding the insurer attorney’s fees and costs. Abbey/Land demonstrates that there is an outer limit to claimants’ and insureds’ ability to settle and name a stipulated judgment price but also serves as an example of how high an insurer’s burden is to prove collusion and unreasonableness.
In 2000, real estate developer Donald G. Abbey (Abbey) formed Abbey/Land, LLC to purchase and build a residence on Shelter Island in Montana. Abbey/Land formed Glacier Construction Partners, LLC to act as the general contractor for only that project. Abbey/Land was the sole owner, manager, and member of both Abbey/Land and Glacier and signed the general contract for the project on behalf of both parties.
In 2009, Interstate Mechanical, a subcontractor, initiated arbitration proceedings against Abbey/Land and Glacier. Abbey/Land and Glacier asserted claims against Interstate in the arbitration and in lawsuits. Glacier tendered the claim to its commercial general liability insurer, James River Insurance Company, which was denied. In January 2011, the arbitrator awarded Glacier $414,021 in damages from Interstate. However, the arbitrator also found fault with Glacier’s management and administration of the construction project. Immediately after the arbitration award, Abbey shut down Glacier’s operations, transferred the company’s assets to Abbey/Land and another Abbey company, and made a written demand against Glacier for the arbitration award.
In September 2011, Abbey/Land filed a complaint in state court, naming Glacier as a defendant. Glacier renewed its tender for a defense to James River, which was denied. Glacier and Abbey/Land entered into a settlement agreement that addressed the arbitration award and all the related state court actions. Glacier stipulated to a $12 million judgment in favor of Abbey/Land.
In 2014, after the district court entered the judgment, James River appealed. The supreme court reversed the entry of the judgment, allowing James River to challenge it. On remand, the district court found the judgment was unreasonable and collusive. The court, however, declined to dismiss the entire judgment and instead reduced it to $2.4 million. The court also awarded James River more than $925,000 in attorneys’ fees and court costs. James River appealed again.
The “Extraordinary” Record Demonstrates Collusion and Unreasonableness
On appeal, the Supreme Court of Montana explained that an insured is justified in limiting its liability by entering into a stipulated judgment when an insurer wrongfully refuses to defend. In turn, the insurer becomes liable to the insured for resulting defense costs, judgments, or settlements, unless the insurer can prove collusion or unreasonableness.
The supreme court explained that reasonableness is dictated by what a reasonably prudent person in the insured’s position would have settled for based on the merits of the claim and the risks of going to trial. The supreme court found that the evidence of damages against Glacier would not have approached $12 million at trial, that the calculations for loss of use and loss of saleable lot were questionable, and that Abbey/Land failed to mitigate. The supreme court further noted Abbey/Land and Glacier both settled with Interstate, the primary liability defendant, for $500,000. Moreover, at settlement, Glacier had no risk of exposure because all of its assets were already transferred to Abbey/Land. The supreme court agreed with the district court that the consent judgment was unreasonable.
The supreme court explained that collusion “implies the existence of some sort of agreement aimed at defrauding another or otherwise breaking the law” and requires an analysis of the particular circumstances and facts of each case. Without more, the shared ownership of parties entering into a stipulated settlement agreement is not per se collusive. Witnesses from both sides testified that real estate developers commonly hold interests in both a real estate development business and a construction business to protect assets and obtain additional layers of insurance coverage. However, the court found that Abbey/Land’s and Glacier’s conduct went beyond such structuring. The parties amended their contract to expose Glacier to damages after the arbitrator found Glacier potentially was responsible for some of Abbey/Land’s damages. Emails showed Abbey directed his attorneys for both companies to operate with a unified strategy and removed attorneys who were against an inflated award. And the district court found the parties’ use of the common interest doctrine demonstrated an intent to conceal that settlement was not reached at arms’ length: Glacier worked behind the scenes to suppress evidence related to damages and worked to increase — rather than reduce — the amount of damages. The court held that the settlement was contrived to inflate Abbey’s recovery to James River’s detriment.
The supreme court determined that Abbey Land’s and Glacier’s actions were offensive, making recovery an impairment to the public’s trust in the judicial system. The supreme court reversed the entry of judgment and determined that James River was entitled to attorneys’ fees.
Abbey/Land demonstrates that in states like Montana, which permit stipulated judgments when an insurer refuses to defend, an insurer can successfully contest such a judgment. However, the facts of the case also illustrate the high burden an insurer needs to meet in order to prevail.