INSURANCE: Seeking declaratory judgment as to duty to defend defective siding claims does not constitute direct or anticipatory repudiation breach of contract but is endorsed by Montana Supreme Court… duty to indemnify for insured’s out-of-pocket settlements brokered without insurer’s consent not plausible breach of contract… plaintiff in underlying State Court suit against siding Defendant not a necessary party to declaratory action under rationale forged by this Court in light of open question in 9th Circuit… Landis stay of declaratory action granted as to on-the-merits determination of whether claims in State Court suit are covered by Policy, denied in all other respects… Christensen.

Various persons have asserted claims against Northwest Painting alleging that defective siding was installed on their property. Michelle Desjarlais has sued Northwest in Montana State Court. Northwest notified Cincinnati Ins. of this claim under its CGL policy and Cincinnati is providing a defense under reservation. None of the other claims “have been filed in court,” but other claims continue to “pour in” and Northwest has “paid out-of-pocket” to settle “certain claims.” Cincinnati seeks a declaration that it has no duty to indemnify or defend Northwest as to the Desjarlais suit. She was not named as a party to Cincinnati’s declaratory action. Northwest has counterclaimed alleging that Cincinnati breached or engaged in an anticipatory repudiation of its duty to defend and breached its duty to indemnify. Before the Court is Northwest’s motion to join necessary party and stay proceedings and Cincinnati’s partial motion to dismiss.

To state a direct or anticipatory repudiation breach of contract claim under Montana law the insured must first allege existence of a contract that contains a duty to defend. For a direct breach of contract claim it must allege that the insurer failed to furnish a defense after a complaint was filed against the insured that alleges facts which, if proven, would result in a covered liability under the contract. For an anticipatory breach of contract claim it must allege facts plausibly establishing that the insurer has entirely, absolutely, and unequivocally repudiated its contractual obligation to provide a defense for future claims. Northwest succeeds in the first regard by alleging that it and Cincinnati are parties to an insurance contract containing a duty to defend. It is in the 2nd regard where its direct breach of contract claim loses its plausibility.

As Cincinnati argues, the allegations in Northwest’s counterclaim demonstrate that the only claim possibly triggering the duty to defend is the Desjarlais suit. Northwest’s allegations further establish that Cincinnati has been providing a defense subject to a reservation of rights. In other words, taking Northwest’s counterclaim as alleged, Cincinnati has not breached its contractual duty to defend; it is actively fulfilling it. Under these allegations, Northwest cannot plausibly state a claim for direct breach of contract. This claim will be dismissed.

Northwest’s anticipatory repudiation breach of contract fares no better. The problem is not so much with Northwest’s allegations, but their implausible application to Montana’s law regarding anticipatory repudiation claims. Northwest claims that Cincinnati is liable for anticipatory repudiation because it filed the declaratory action, asserted it has no duty to defend, and reserved its right of reimbursement. Cincinnati argues that it is just following the procedure endorsed by the Montana Supreme Court when a suit triggers the duty to defend but the insurer maintains that it ultimately presents an uncovered claim. The Court agrees.

Montana law unambiguously outlines the path an insurer should follow when its insured is named in a suit but contests its obligation to provide a defense. First, an insurer should initially provide a defense, because if it incorrectly withholds one it will be liable for all “natural and ordinary consequences of the breach,” including the value of any settlement, costs, and attorney fees. Independent Milk (Mont. 1923). Second, if an insurer intends to recoup the costs incurred in defending its insured it should timely and explicitly reserve “its right to recoup defense costs.” Ribi (Mont. 2005). Finally, the insurer should expeditiously file a separate declaratory action so the dispute regarding the contractual duty to defend can be resolved. Tidyman’s (Mont. 2014); Freyer (Mont. 2013) (noting that in situations akin to that presented here the Montana Supreme Court has “repeatedly admonished insurers” to “defend the insured and file a declaratory judgment action to discern coverage”). Such conduct is not the anticipatory repudiation of a contractual duty to defend, but is the strict adherence to various teachings from the Montana Supreme Court.

Northwest’s allegations that Cincinnati has furnished a defense against the Desjarlais suit under reservation and then filed a declaratory action on the issue is not the sort of entire, absolute, and unequivocal repudiation of a contractual obligation necessary to state a claim. Under the facts that Northwest itself alleges, the only plausible theory advanced is that Cincinnati has conditionally repudiated its duty to defend (while actively continuing to honor it) with such repudiation only becoming entire, absolute, and unequivocal upon a favorable ruling in the instant declaratory action. The Court will grant Cincinnati’s motion to dismiss as to both of Northwest’s breach of contractual duty to defend counterclaims.

Northwest’s remaining breach of contract counterclaim complains that Cincinnati flouted its duty to indemnify by refusing to settle claims by other claimants, which Northwest was forced to then settle at its own cost, out of pocket. Cincinnati agues that this claim should be dismissed because the Policy prohibits settlement of claims by Northwest without Cincinnati’s consent. It maintains that it is proper to examine the Policy, an outside material, in adjudicating this 12(b)(6) motion because Northwest’s counterclaim references it. Northwest endorses this approach and does not directly contest Cincinnati’s position regarding the Policy’s prohibition on unapproved settlements by the insured.

The Policy’s CGL and umbrella coverages provide that “no insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without the insurer’s consent.” Under Cincinnati’s view, because Northwest’s breach of contractual duty to indemnify counterclaim fails to establish that Northwest’s out-of-pocket settlements were reached with Cincinnati’s consent, it fails to state a claim. Northwest puts up little resistance in response. Instead, it argues that Cincinnati has anticipatorily repudiated its duty to indemnify by filing this declaratory action. Additionally, it confusingly devotes significant argument in its response brief to the notion that Cincinnati has breached the covenant of good faith & fair dealing by failing to properly investigate claims. Neither of these arguments accurately reflects the claims in Northwest’s counterclaim or otherwise contests the substance of Cincinnati’s argument regarding the duty to indemnify claim.

Unlike the breach of contractual duty to defend claim, Northwest does not premise its breach of the contractual duty to indemnify counterclaim on a theory of anticipatory repudiation. Its counterclaim does not mention the duty of good faith at all, let alone assert a stand-alone claim couched under an ostensible failure to investigate. Accordingly, the Court will disregard those arguments as they either distort the pleadings, are an attempt to assert new claims, or have no bearing on whether Northwest has plausibly pled a claim for breach of the contractual duty to indemnify. Provencio (ED Cal. 2009) (“Raising a completely new theory of liability, with only attenuated connection to the complaint, in a brief in opposition to a motion to dismiss” can only be accomplished after requesting leave to file an amended complaint).

Left with little else, the Court has no choice but to adopt Cincinnati’s argument. Morrissey (9th Cir. 2003) (it is not a court’s job to develop a party’s arguments). The Policy, upon which Northwest’s counterclaim necessarily relies, establishes that a duty to indemnify for out-of-pocket settlements only arises if such settlements are brokered with Cincinnati’s consent. Northwest’s counterclaim does not contain any allegations that it obtained consent from Cincinnati prior to entering into the out-of-pocket settlements. Consequently, Northwest’s breach of the contractual duty to indemnify counterclaim lacks facial plausibility and will be dismissed.

Northwest maintains that Desjarlais, the plaintiff in the only underlying suit against Northwest, must be joined as an indispensable party to Cincinnati’s declaratory action. Cincinnati does not oppose joining her but disagrees that she must be joined as an indispensable party.

To determine whether a party must be joined pursuant to Rule 19 this Court “must determine: (1) whether an absent party is necessary to the action; and then, (2) if the party is necessary, but cannot be joined, whether the party is indispensable such that in equity and good conscience the suit should be dismissed.” Roberts (9th Cir. 2020). As to whether the party is necessary, the Court must determine whether: “complete relief can be afforded if the action is limited to the existing parties;” or “the absent party has a ‘legally protected interest’ in the subject of the action and, if so, whether the party’s absence will ‘impair or impede’ the party’s ability to protect that interest or will leave an existing party subject to multiple, inconsistent legal obligations with respect to that interest.” White (9th Cir. 2014). “If the answer to either of those questions is affirmative, then the party is necessary and must be joined.” Id. The parties hone their arguments on the legally protected interest prong, so the Court will focus its attention there as well.

Whether an injured 3rd-party claimant is a necessary party to a declaratory action between an insurer and its insured appears to be an open question in the 9th Circuit. Authority from other courts is numerous and conflicting. District courts within the 9th Circuit have generally found them to be necessary parties when the subject of the action is whether the 3rd-party claim is covered by available insurance proceeds. Despite the weight of this persuasive authority, the Court elects to forge its own path given the circumstances here. Bakia (9th Cir. 1982) (“there is no precise formula for determining whether a particular nonparty should be joined under Rule 19(a)” and the “determination is heavily influenced by the facts and circumstances of each case”). The Court is skeptical that Desjarlais has a legally protected interest in the Rule 19(a) sense. The 9th Circuit has been clear that a mere “financial stake” in the outcome is insufficient to constitute a legally protected interest. Cachil Dehe (9th Cir. 2008). It is hard to see how her interest in this suit extends beyond a mere financial interest.

She obviously has an interest in a favorable coverage determination because without one she will possibly be left with an uncovered judgment. But this interest is nothing more than “speculation about a future event,” mainly that she will possibly prevail in the underlying action and then possibly be unable to collect on a judgment against Northwest because of a lack of attachable assets. This is insufficient to constitute a legally protected interest under Rule 19(a). Moreover, this Court has rejected the notion that anyone has a legally protected interest in having their judgments covered by insurance. Philadelphia Indemnity (D.Mont. 2021) (“The law, as a general matter, does not entitle one to have an actionable claim covered by insurance.”). Moreover, the Court is skeptical that even if Desjarlais had a legally protected interest it would not be protected without joinder or that either Northwest or Cincinnati would be subject to multiple, inconsistent legal obligations with respect to that interest. Rule 19(a)(1)(B). The parties correctly focus this inquiry on whether she, if absent from this action, would be bound by any judgment of this Court regarding availability of coverage for her claim. Northwest maintains that she “would not necessarily be bound by the outcome of this Court’s determination of coverage liability.” Cincinnati contends that there is no risk of double, multiple, or otherwise inconsistent obligations because “collateral estoppel and/or res judicata would apply to Desjarlais and the property owners without their joinder because they are in privity with Northwest on the issue of coverage.”

Neither claim (res judicata) nor issue (collateral estoppel) preclusion will apply “to a party that was not a party in the prior proceeding” unless they are in privity with a party to that proceeding. Denturist Association (Mont. 2016). The question thus becomes whether Desjarlais is in privity with either Cincinnati or Northwest such that a coverage determination in this action would be binding on her and thus eliminate the risk of double, multiple, or inconsistent obligations. Ultimately, privity is a “factual determination of substance, not mere form,” requiring a “consideration of the realities of litigation.” Id.

The interests of Desjarlais and Northwest are sufficiently aligned to justify the conclusion that collateral estoppel or res judicata would likely bar relitigation of this coverage dispute in a subsequent action. They seek the same endgame — coverage for a potential liability event on the part of Northwest. There is no reason to conclude that Northwest will advance different or worse arguments than Desjarlais as to the issue of coverage when they are after the same outcome. Consequently, even if she had a legally protected interest within the meaning of Rule 19(a)(1)(B) (which she does not), her absence would neither impede her ability to protect this interest nor create a risk of double, multiple, or inconsistent legal obligations.

Having concluded that Desjarlais is not a necessary party, the Court will deny Northwest’s motion to join her as an indispensable party. The Court also declines to join her simply because Cincinnati does not oppose this result. The Court will not thrust a party into this suit on the basis of an agreement of the parties. Either party is free to move for leave to amend their pleadings to advance a claim against Desjarlais. She is also free to move for leave to intervene under a theory of mandatory or permissive joinder.

Northwest urges the Court to stay this action pursuant to Landis (US 1936) pending resolution of the underlying Desjarlais suit. Cincinnati disputes that Landis governs, instead relying on Brillhart (US 1942) and in any event opposes a stay.

The Court is persuaded by Northwest’s argument that Landis applies. Brillhart is not a good fit for several reasons. First, it arose in the context of a parallel state court proceeding “presenting the same issues, not governed by federal law” and “between the same parties.” The Desjarlais suit neither raises identical issues nor has identical parties. Second, Brillhart governs situations in which a party urges a district court to decline jurisdiction over an otherwise proper declaratory claim. Robinson (9th Cir. 2005). It applies when a party urges the court to dismiss or remand a declaratory claim altogether, not when a party simply requests that adjudication be stayed. Dizol (9th Cir. 1998). Finally, the 9th Circuit has made clear that Brillhart is inappropriate when an action presents at least one independent non-declaratory judgment claim. Dizol. A “claim is independent if it would continue to exist if the request for a declaration simply dropped from the case.” Scotts (9th Cir. 2012). While declaratory claims predominate here, at least one non-declaratory counterclaim is brought by Northwest under Montana’s UTPA.

Under Landis this Court possesses the “discretionary power to stay proceedings in its own court.” Lockyer (9th Cir. 2005). A Landis stay is inappropriate unless the party seeking it makes out “a clear case of hardship or inequity in being required to go forward, if there is even a fair possibility that the stay will work damage to someone else.” Id. The 9th Circuit has distilled the Landis inquiry into a weighing of “the competing interests which will be affected by the granting or refusal to grant a stay,” including “the possible damage which may result from the granting of a stay, the hardship or inequity which a party may suffer in being required to go forward, and the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay.” Id.

Northwest argues that any hardship imposed on Cincinnati by having to continue expending defense costs is insufficient to preclude a stay while it will be forced to litigate on 2 fronts in this action and the Desjarlais suit and the orderly course of justice will be impeded should this Court wade into unresolved factual issues regarding coverage that will necessarily be resolved by the State Court adjudicating the Desjarlais suit. In Cincinnati’s view, both parties benefit if the duty to defend and indemnification issues in this action are resolved without delay. It also maintains that a stay is improper because the issues in this action — whether it has a duty to defend or indemnify Northwest against certain property owner claims — are ultimately distinct from the issues in the Desjarlais suit, which advances myriad claims against various parties. Weighing the factors itself, the Court concludes that there is an appropriate middle ground.

Before diving into the factors, the Court finds it prudent to discuss the circumstances surrounding this case, which underscore the need for a stay of some but not all parts. The parties agree that multiple property owners have put Northwest on notice of claims, that more claims are possible, and that only one (Desjarlais) has actually proceeded to court. Cincinnati seeks various declarations including that it has no duty to defend or indemnity Northwest with respect to the Desjarlais suit, it has no duty to defend or indemnity Northwest with respect to all other property owner claims including an administrative complaint, and it need not reimburse or indemnify Northwest for out-of-pocket settlements entered into without its consent. Northwest seeks counter declarations and advances a UTPA claim.

It is proper to split this dispute into 2 analytical categories for assessing whether a stay should be imposed. On one side are the declaratory claims that relate to the Desjarlais suit. On the other side are the declaratory claims related to other property owners’ claims, the issue of reimbursement or indemnification for out-of-pocket settlements, and the UTPA claim. Essentially, there are the Desjarlais claims and everything else. A limited stay of the Desjarlais claims is proper but the Court will not stay any other part of the case.

The Court will address the first 2 Landis factors in tandem because both involve weighing possible ill effects occasioned on the parties by either staying or refusing to stay this action. As Northwest points out, an insurer’s continued expenditure of defense costs during a stay is generally insufficient to constitute “damage” in the Landis context. Bottini (SD Cal. 2020) (“Arguments concerning defense costs have been rejected by courts to support any prejudice to the non-moving party on a motion to stay.”). The logic behind this is that because insurers are “in the business of advancing defense costs,” they cannot complain about having to do so, Ou (CD Cal. 2019), and can often recoup wrongfully expensed defense costs from the insured, Zurich (ND Cal. 2019). Consequently, the Court agrees that Cincinnati’s continued expenditure of defense costs as to the Desjarlais suit is not sufficient reason to deny Northwest’s request for a stay.

But the Court is concerned that Cincinnati will be harmed if it is unable to begin discovery into the aspects of this case that involve other claimants than Desjarlais. This weighs against staying this action in its entirety. As to Northwest, the difficulties attendant to fighting the Desjarlais suit claim on 2 fronts weighs in favor of a stay on the part of Cincinnati’s claim that involves its duty to indemnify the claims advanced in that action. Zurich. However, this risk of harm does not translate to the other aspects of this case which do not depend on resolution of the Desjarlais suit. The first 2 Landis factors weigh in favor of staying the Desjarlais suit duty to indemnify claim but not any other claims advanced in this action.

The Court reaches a similar conclusion as to the 3rd factor — the orderly course of justice. While Cincinnati’s Desjarlais suit duty to indemnify claim may require this Court to wade into factual issues that will ultimately be resolved in the Desjarlais suit, this is the State Court’s prerogative and this Court will not “risk making factual determinations that may conflict with the state court’s findings” on these issues. Id. Additionally, if a stay were not granted as to the Desjarlais suit duty to indemnify claim Cincinnati would be incentivized to improperly posture itself in a manner adverse to Northwest’s interest in that proceeding. Home Indemnity (D.Or. 2001). Both of these considerations weigh in favor of entering a stay as to the Desjarlais suit duty to indemnify claim. As with the other considerations, however, these concerns are not implicated by any other part of this case.

After weighing the foregoing factors, the Court concludes that it should stay adjudication of Cincinnati’s declaratory claim regarding its duty to indemnify Northwest in the Desjarlais suit, but refuses to stay any other aspect of the case. Cincinnati’s remaining declaratory claims may proceed without delay, including the Desjarlais suit duty to defend claim, because resolution of that issue presents a question of law resolvable without a factual record. Deck (Mont. 2016) (to determine whether there is a duty to defend, one need only examine the underlying complaint to asses if it “alleges facts, which if proven, would result in coverage”).

Cincinnati Ins. v. Northwest Painting, 44 MFR 250, 7/26/21.

Kristine Beal & Ian Gillespie (Beal Law Firm), Missoula, for Cincinnati; J.R. Casillas & Trent Baker (Datsopoulos, MacDonald & Lind), Missoula, for Northwest.

PRODUCT LIABILITY: Summary judgment rulings as to fire/injuries from leaking barbecue grill propane tank… summary judgment denied for valve manufacturer… summary judgment granted as to punitives for store, denied as to propane supplier… all affirmative defenses including misuse and assumption of risk precluded… Plaintiffs’ motion for summary judgment denied as to liability… recommendations by Cavan adopted by Watters.

Todd & Amber Copenhaver attended a barbeque at the home of Richard Burris in Glendive 9/3/17. Burris attempted to light the gas grill but the propane cylinder was empty. He checked the regulator and hose, turned off the grill, and intended to go to the store for a new cylinder. Todd Copenhaver offered to retrieve a recently purchased cylinder from Albertsons that was at his home a short distance away. He went home and returned with it. Burris placed it in a doorless grill cabinet and connected the grill’s hose to the cylinder valve. The cylinder and grill were connected by a “black nut” or “791 nut.” It is disputed whether he fully tightened it. He opened the valve, turned on a burner, and ignited the grill. He did not hear or smell gas leaking. He activated the remaining burners, closed the grill lid, and went into the house. He returned in a few minutes to clean the grill but found a ball of flame emanating from the cylinder. A 1-foot flame burned from the top of the cylinder and rolled out of the lower cabinet and up the front of the grill. He ran into the house, called for Todd’s help, and grabbed an oven mitt to turn the valve off. Todd also grabbed oven mitts and followed. Todd does not recall smelling gas but heard “hissing” that he assumed came from the propane cylinder. Burris shut the valve off. The parties dispute how quickly the flame diminished in relation to closing the valve but agree that the fire diminished to a flame about the size of a disposable lighter. Todd blew the remaining flame out, then checked to make sure the valve was fully off. He could not determine the origin of the flames beyond the general area of the valve. The regulator hose fell off the valve untouched, detaching the grill from the cylinder. The valve opening appeared to be clear. Todd heard a leaking noise, a “real low, quiet hiss,” assumed it came from the cylinder, and could also smell propane. He told Burris they needed to move the cylinder into the yard. He reached into the cabinet and grabbed the cylinder. He saw no flame. But as he moved the cylinder he heard a “mechanical sound” like a “mechanical click, pop” which startled him and he dropped the cylinder. At some point in this moment he saw a flame, either before or after dropping it. He leaped through the flame toward his wife Amber, who was across the deck, to remove her from harm’s way. Todd testified that he thought the flame shot out 10 feet parallel to the house. It severely burned his leg, left arm, and hand, and Amber injured her hip as she and Todd tumbled off the deck. Both were hospitalized.

Copenhavers sued Cavagna Group, AmeriGas Propane, and Albertsons asserting product liability and punitives, alleging that a leak in the rubber sealing gasket inside the valve allowed gas to escape and ignite from the lit grill. They name Cavagna as the entity that designed, manufactured, and sold the valve, AmeriGas as the supplier and seller of the propane, cylinder, and valve, and Albertsons as seller and distributor of the cylinder and valve. Cavagna moves for summary judgment. AmeriGas and Albertsons move for partial summary judgment on punitives. Copenhavers move for partial summary judgment as to affirmative defenses other than misuse and assumption of risk, as to misuse and assumption of risk, and as to liability. Argument was held 7/13/21.

Cavagna’s motion for summary judgment.

Cavagna asserted that Burris’s testimony established that he fully tightened the 721 nut when connecting the cylinder to the barbeque and all experts agree that there would have been no leak from the valve had it been completely tightened, and that since he did not perform a leak test when securing the cylinder to the nut he failed to abide by the warning and instructions in the barbeque manual. It contends that this failure represents the sole proximate cause of the accident. However, at oral argument it candidly acknowledged that fact issues exist that preclude summary judgment as to Copenhavers’ theory of recovery. The Court agrees. Copenhavers point to evidence which would contradict Burris’s testimony and support the conclusion that the nut was not fully tightened. For example, Copenhavers’ experts believe the fire originated from a leak in the valve, which only occurred during testing when it was open 5/8ths of a turn from tight, and also testified at deposition that it is known “in the industry” that loosening of the nut can inadvertently occur when moving the cylinder, causing a leak. Burris moved the cylinder into the cabinet on the barbeque after securing the nut. Cavagna’s expert counters that the nut did not loosen when moving the cylinder during his testing and that Copenhavers’ experts’ theory that the nut loosened 5/8ths of a turn is not possible. Credibility of Burris and the parties’ experts, as well as the strength of the experts’ theories and test results, are for the trier of fact. Wood (Mont. 1997) (“Juries have an uncanny ability to evaluate the credibility of a witness, especially an expert.”). Material fact issues exist on the source of the leak.

Cavagna’s argument that Burris’s failure to perform a leak test and abide by warnings and instructions was the sole cause of Copenhavers’ accident injury also fails. Causation is ordinarily a question of fact for the jury. Doran (D.Mont. 2019) (“In rare circumstances, causation may be determined as a matter of law ‘where reasonable minds can reach but one conclusion regarding causation.’”) Id.; Riley (Mont. 1993). This is certainly not one of those rare cases. If the jury finds that the fire was the result of a defective condition it certainly could find that the defect was both a cause-in-fact and proximate cause of the fire and Copenhavers’ injuries.

AmeriGas/Albertsons’ motion for partial summary judgment on punitives.

AmeriGas and Albertsons argue that Copenhavers have no evidence to support punitives elements. Copenhavers respond that there is “vast evidence” of AmeriGas’s knowledge of the leaking valve seal and that Albertsons had notice of the defects but turned a blind eye. They proceed under a theory of actual malice under MCA 27-1-221(2). A plaintiff is not required to prove actual malice at the summary judgment stage, but that a genuine dispute exists. Wolfe (D.Mont. 2017); Hagen (Mont. 1993).

AmeriGas relies heavily on Dunn (D.Mont. 2011) in which Judge Molloy found that 14 known incidents of a product-related injury over 50 years is not sufficient “proof that would allow a reasonable trier of fact to find beyond any serious or substantial doubt” that a load binder created a high probability of injury. At oral argument AmeriGas similarly cited statistics of the number of Cavagna valves and AmeriGas cylinders sold v. the number of valve malfunctions to illustrate the low probability of injury due to the alleged defect. But these comparisons are not set out in its statement of undisputed facts as required by LR 56.1. It did file a supplemental declaration after Copenhavers filed their response brief and statement of disputed facts which attaches exhibits mentioning the number of Cavagna valves sold yearly and the number of locations in the US where AmeriGas cylinders are available for purchase or exchange. This leaves any statistical comparison with the number of known valve leaks incomplete in the record. Further, the number of incidents used in oral argument appeared to relate to known claims or events and not the prevalence of leaks in general. The record simply does not support a conclusive finding on the prevalence of leaks from which the Court can make a determination at summary judgment.

Nevertheless, even if the incidents of valve leaks are minuscule compared to the number of valves and cylinders sold, Copenhavers have sufficiently raised a material fact issue as to AmeriGas’s knowledge of potential problems with valve seal failures and the apparent prevalence of those problems. First, AmeriGas acknowledges that it was involved in 3 suits involving allegations of defective Cavagna valves. While AmeriGas was not found liable in any of them it appears that its expert testified that the valve had the same defect that Copenhavers allege. Second, AmeriGas was aware of concerns with Cavagna and similar valves through its membership and participation in the National Fire Protection Association and the National Propane Gas Association, whose proceedings often discussed valve leak issues. For example, David Hedrick of AmeriGas was copied on a 9/4/15 email relating to “1836 Face Seals” that announced an action item approved by the NPGA Executive Committee:

Working through task force Tvfc-1836 “CGA 721 Connections,” the TS&S Committee discussed reported incidents of CGA 791 valve seals leaking after cylinders were connected to a grill or other appliance. These seals have shown to be wearing over time and are not replaceable on the valves. The entire valve must be removed and replaced with a new valve.

Other AmeriGas representatives were also included in emails regarding seal failures and ways in which early failure may be addressed or remedied. Through these emails it appears that AmeriGas knew of risks associated with leaking valves, the risk of seal failure tended to increase as the valves age, the failures may be due to defective materials, and the risks were at least prevalent enough to consider a recall of the valves and/or cylinders. These facts are sufficient to raise a material fact issue as to Copenhavers’ punitives claim against AmeriGas.

But they have failed to raise material fact issues as to Albertsons’ knowledge of facts regarding the alleged defect. Troy Darmody, Director of Safety for Albertsons’ Intermountain Region, testified that “Albertsons was not/is not aware of an existing defect in the product such that it presents an unreasonable safety hazard to our customers, or have not been notified by the supplier that such a safety — or such a defect exists.” Geri Cullinen also testified that in her 20 years as an Albertsons manager in Glendive she could not recall an incident of an employee or customer reporting a propane tank leak. Copenhavers failed to raise a factual dispute in briefing or at oral argument. They cite Darmody’s deposition and represent that he testified that there were “two propane related issues per year over the last 10 years related to AmeriGas Cylinders in the Intermountain Region alone.” However, their citation does not support their contention; the cited pages do not contain a discussion of “propane related issues.” But even if Darmody testified to that effect, they do not specify the nature of the “propane related issues” and whether they relate to the Cavagna valves, valves on cylinders in general, or even to leaking gas.

Copenhavers’ motion for partial summary judgment on affirmative defenses other than misuse and assumption of risk.

Under MCA 27-1-719(5) only the affirmative defenses of misuse and assumption of risk are allowed in strict liability defective design or manufactured product claims. Kenser (Mont. 2014); Speaks (D.Mont. 2015) (“The only defenses available in Montana strict liability actions are statutory.”) Defendants conceded the point in briefing and at oral argument but assert a reservation of the right to introduce evidence relative to other defenses which may be relevant to causation. However, they agreed that those evidentiary matters would be reserved for trial and that summary judgment of all affirmative defenses as to liability other than misuse and assumption of risk is appropriate.

Copenhavers’ motion for partial summary judgment as to misuse.

Copenhavers argue that Todd’s conduct was foreseeable and therefore the defense of misuse is not available under Montana law.

They state that Cavagna was asked in discovery to disclose the basis for its affirmative defenses and it responded by incorporating a response to another interrogatory which stated that neither Burris nor Copenhaver read or followed instructions and warnings for the barbeque or cylinder, Copenhaver did not ensure that Burris followed those warnings, neither of them ensured that all components of the barbeque were present and in use, and their actions and inactions “when they became aware of the incident, were contrary to the instructions in the BBQ manual, cylinder sleave and good sense.” Copenhavers assert that none of these alleged failures may serve as a basis for the affirmative defense of misuse. They correctly point out that under MCA 27-1-719(5) “contributory negligence is not a defense to the liability of a seller, based on strict liability in tort.” Therefore, Todd’s alleged negligence in responding to the incident or his failure to otherwise use reasonable care does not support a misuse defense. The “issue in products liability cases is not the conduct of the ‘reasonable person,’ but the condition of the product.” Malcolm (Mont. 2009). To put the focus on the reasonableness of Todd’s conduct attempts “to interject negligence concepts into this design defect case.” Id.; Lutz (Mont. 1994). Copenhavers also correctly assert that the conduct of Burris, as an unnamed 3rd party, cannot be asserted as a defense to diminish Cavagna’s liability. A manufacturer’s attempt to apportion liability to an unnamed 3rd party in a product liability case violates Montana’s prohibition against the “empty chair defense.” Bell (D.Mont. 2000). Copenhavers also assert that all conduct that was warned against was foreseeable, citing Dunn and Speaks for the proposition that a warning included with a product can establish that a particular use warned against is foreseeable. Cavagna makes only a passing reference to the defense of misuse but fails to rebut Copenhavers’ arguments or present any facts or argument that any alleged misuse was unforeseeable. The only argument which may go to misuse consists of a list of warnings that Burris and Todd allegedly failed to heed. But, as pointed out by Copenhavers, this argument is not helpful to Cavagna on the issue of foreseeability. To the contrary, “evidence of foreseeability can be found in the warnings.” Dunn. This principle was applied in Speaks in granting summary judgment on the misuse defense. Mazda argued that the plaintiff misused her seat belt by routing the strap under her armpit rather than over her shoulder. The Court found it “abundantly clear” that her “alleged ‘misuse’ of the restraint system by routing the shoulder belt under her arm was foreseeable to Mazda. In fact, Mazda actually foresaw it. In the Protege owner’s manual Mazda specifically warned against routing the shoulder belt under the arm.” Copenhavers have shown that Cavagna does not have sufficient evidence on an essential requirement of its misuse defense.

Copenhavers’ motion for partial summary judgment as to assumption of risk.

Copenhavers argue that assumption of risk is not available because there is no evidence that Todd’s conduct was unforeseeable or to establish the subjective knowledge requirement. Lutz. Cavagna argues that Todd’s repeated failure to adhere to warnings supports its defense of assumption of risk and that Nicole Burris’s testimony also raises issues of fact. Her testimony does differ from Todd’s as to the events immediately preceding and following the ignition of flames but they are not material since there is insufficient evidence for a jury to find assumption of risk under either scenario. Todd testified that after the flames were initially extinguished from the cylinder he heard a quiet hissing and could smell propane. He recognized that there was risk of fire or explosion and said “we have to get this out into the yard.” As he reached under the barbeque and pulled the tank out he heard a click-pop and dropped the tank and flames then started shooting out of the valve and he tried to get out of the way. He heard Amber screaming and ran to her and pulled her off the porch. He testified that had he known that a fire would result from his handling of the cylinder “I would never have pulled the tank out” and “in my mind I was making it safer than it would be if it was sitting right there next to the house. My whole family was inside at that point.” Under his version there is no evidence that would allow a reasonable trier of fact to find assumption of risk under Lutz‘s subjective standard. As made clear in Lutz, Cavagna would have to prove that he knew of the defect and that use of the product would result in the fire and if the fire occurred he would suffer some injury and that he proceeded anyway. Certainly it could be argued that Todd’s actions were not prudent and that his conduct was negligent. But negligence is clearly not sufficient. There have been no facts presented that would allow a reasonable juror to conclude that he knew the cylinder would start on fire and burn him as Lutz requires. (“Lutz did not unreasonably make use of the product, unless, of course, he knew in advance that the crane cable would come in contact with the power line.”)

Contrary to Todd’s testimony, Nicole Burns testified that when she came out of the house after the initial fire was extinguished she saw the cylinder on the porch. It was not on fire and it was a sufficient distance from the barbecue that someone could walk between them. She testified that there was a loud bang/pop and she then observed the cylinder on the ground spewing flames and that neither Todd nor Amber was in danger and both could have safely retreated from the porch. She recalled that Todd was standing on the other side of the porch next to Burris and Amber was standing in front of Nicole by the door. Nevertheless, she said Todd ran the length of the porch through the fire and tackled Amber over the railing, and that Todd was burned when he ran through the flames and Amber was injured when she was tackled. Cavagna argues that Nicole’s testimony that Todd “inexplicably ran through the fire” creates an issue of fact on assumption of risk. But the assumption of risk defense fails under this scenario for another reason. MCA 27-1-719(5)(a) requires that “the user or consumer of the product discovered the defect or the defect was open and obvious and the user or consumer unreasonably made use of the product and was injured by it.” The trier of fact could conclude that Todd was aware of the defect or the defect was open & obvious after the initial fire occurred, but under Nicole’s testimony he was not making any use of the cylinder when the event occurred. Therefore whether the jury chooses to believe Todd’s or Nicole’s version, the assumption of risk defense is not applicable.

Copenhaver’s motion for partial summary judgment as to liability.

Copenhavers argue that there are only 2 theories as to how the fire started. Their experts believe it originated from a leak in the valve’s connection to the regulator on the grill. Defendants’ experts assert that the leak came from the “spud” — where the valve is connected to the cylinder. Copenhavers assert that regardless of which theory is correct, the product was in a defective unreasonably dangerous condition when it was sold to Todd.

A prima facie case of product liability consists of 3 elements:

(1) The product was in a defective condition, “unreasonably” dangerous to the user or consumer;

(2) The defect caused the accident and injuries complained of; and

(3) The defect is traceable to the defendant.

Winters (D.Mont. 2009; Meyer (Mont. 1999).

Material fact issues exist as to the 2nd and 3rd elements of causation and traceability. The experts disagree as to the cause of the leak. Copenhavers’s experts’ report details their testing, analysis, and conclusion that it originated from a defective Cavagna face seal. It concluded, inter alia, that numerous defects caused the leak including the valve’s 2-slot design and the check valve gasket’s materials and deformation. Cavagna disputes these conclusions with the affidavit of its President Richard Darche and 2 experts. Darche states that the tested valve was damaged in the fire, thus the test results showing a leak was a result of the initial fire, not a defect. Its experts also reject the conclusions of Copenhavers’ experts point-by-point and posit that it is the spud that leaked and caused the fire. Credibility of these witnesses as well as the strength of their testing, analysis, and conclusions are for the trier of fact. Cavagna has clearly raised material fact issues as to the 2nd element of causation.

Moreover, the dispute over the source of the leak (valve v. spud) is also critical to the 3rd element, traceability of the defect to the individual defendants. The jury’s determination of the source of the leak will inform their determination of which Defendant may be liable, if any liability is found. If the Cavagna valve is found to be defective, for example, the jury could find all Defendants liable. In that event AmeriGas and Albertsons argue that they will have a right to seek indemnification from Cavagna. If the connection at the spud is found to have caused the fire, Cavagna may not be found liable. The jury may find that the defect had nothing to do with the valve as opposed to how the valve was connected to the cylinder after it left Cavagna’s possession and control. In that event, AmeriGas and Albertsons may still be found liable and have no right to seek indemnification from Cavagna. The jury may also find that neither theory is credible and that the fire was caused by some other factor.

The Court recommends that:

Cavagna’s motion for summary judgment be denied;

AmeriGas’s and Albertsons’ motion as to punitives be granted as to Albertsons and denied as to AmeriGas;

Copenhavers’ motion for partial summary judgment as to affirmative defenses other than misuse or assumption of risk be granted;

Copenhavers’ motion for partial summary judgment as to misuse and assumption of risk be granted;

Copenhavers’ motion for partial summary judgment as to liability be denied.

 

 

– – – 

 

Judge Watters’s order adopting Cavan’s F&R.

No objections to Magistrate Cavan’s Findings & Recommendation were filed within 14 days pursuant to 28 USC 636(b)(1). When neither party objects, this Court reviews the Magistrate’s Findings & Recommendations for clear error, which exists if the Court is left with a “definite and firm conviction that a mistake has been committed.” Syrax (9th Cir. 2000). After reviewing the Findings & Recommendations, this Court does not find that Cavan committed clear error. His proposed Findings & Recommendations are adopted in full.

Cavagna’s motion for summary judgment is denied.

Partial summary judgment as to punitives is granted as to Albertsons and denied as to AmeriGas.

Copenhavers’ motion for partial summary judgment as to affirmative defenses other than misuse and assumption of the risk is granted. Their motion for partial summary judgment as to affirmative defenses of misuse and assumption of the risk is granted and their motion for partial summary judgment as to liability is denied.

Copenhaver v. Cavagna Group, AmeriGas Propane, and Albertsons, 44 MFR 246/249, 7/28/21, 8/13/21.

John Morrison & Scott Peterson (Morrison, Sherwood, Wilson & Deola), Helena, for Copenhavers; Calvin Stacey (Stacey & Funyak), Billings, and Frank Ciano (Gerber Ciano Keely Brady), NYC, for Cavagna; Jon Dyre (Crowley Fleck), Billings, and Brook Laskey & Michael Aiken (McCoy Leavitt Laskey), Albuquerque, for AmeriGas and Albertsons.

INSURANCE: Homeowners and umbrella policies potentially covered alleged sexual assaults of tenant by property manager, implicating duty to defend, insurer’s unilateral gamble that they did not results in its liability for $1.1 million state court judgment… Molloy.

Carla Wigton sued David Murphy in 10/19 in 4th District Court alleging that he sexually assaulted her on 2 occasions, harassed her on multiple occasions, and created a hostile living environment. Beginning in 5/17 she was a tenant of Lakeview Village Apartments in Polson, which Murphy managed. She alleges that she qualified for reduced rent based on her disability and income but none of the reduced-rent units were available and Murphy offered her an agreement to rent a standard unit with the understanding that he would help her find “miscellaneous jobs” to cover the excess rent. She signed the agreement. She alleges that on 7/1/17 Murphy invited her to clean his family’s cabin in exchange for her rent. Once she arrived at the cabin he had sexual intercourse with her without her consent. According to her complaint, he entered her residence without permission 7/3/21 and again had sexual intercourse with her without her consent. After the assaults he apologized, asked that she not contact police, and — when news of the assaults circulated through the Lakeview community — distributed letters to tenants denying that the assaults happened and insinuating that Wigton was a liar. She moved out of Lakeview in mid-July allegedly due to the hostile environment Murphy had created and her continued fear of him. Her friends reported the events to police and Murphy was cited for SIWC, witness tampering, and negligent endangerment. He pled nolo and his employment was terminated. Wigton sought recovery on claims of assault, battery, negligence, and violation of Montana fair housing law. She sought damages for medical and psychological care, loss of enjoyment of life, punitives, and attorney fees & costs. Murphy tendered the claim to State Farm, which notified him in 12/19 that it would not defend or indemnify him because the alleged acts were outside the scope of coverage under either his homeowners or umbrella policy. In its letter disclaiming coverage under the homeowners policy it stated:

While there is no question the claims being made in the present Complaint are for bodily injury, based on the information presently known and the allegations pled in the current Complaint, there is a question whether Ms. Wigton is seeking damages because of bodily injury or property damage caused by an occurrence, as these terms are defined within the Homeowners Policy and Endorsement, FE-3485. Specially, in the sense the definition of occurrence requires, in part, an accident, we do not believe that the damages being alleged were caused by an accident.

As to the umbrella it noted:

Inasmuch as a loss includes an accident, including accidental exposure to conditions, which first result in bodily injury or property damage or the commission of an offense which first results in personal injury, based on the information presently known we believe that there are claims being asserted which meet the policy definition of a loss, and therefore the insuring agreement of the [Umbrella Policy] is met.

But despite acknowledging that Wigton’s allegations likely satisfied the definition of “loss,” State Farm repeated its belief that no coverage existed because of the umbrella exclusions related to sexual harassment, business loss, intentional or expected bodily harm, and personal injury resulting from the specific intent to harm. Thus it declined to defend Murphy and did not file a declaratory action.

In 2/21 Murphy entered into a settlement with Wigton, ending the defense of the underlying action and avoiding exposure of his personal assets. He agreed to entry of judgment in the amount of the combined limits of the homeowners and umbrella policies and to assign to Wigton all of his contractual and extra-contractual claims and rights of action related to the underlying action against State Farm. The settlement was contingent on court approval. Wigton was granted her request for a reasonableness hearing — of which State Farm was given notice, although it did not move to intervene or participate — and Wigton offered numerous exhibits and called multiple witnesses. On 4/15/21 Judge Larson then entered judgment for Wigton and against Murphy in the amount of $1.1 million (the combined limit of the policies) for compensatory damages only.

Wigton sued State Farm in State Court in 7/20. State Farm removed to this Court. She alleges breach of contract, arguing that it had a duty to defend Murphy. She also seeks a declaration that it breached its duty and thereby waived its coverage defenses, so it is liable for the 1.1 million judgment. Both parties request summary judgment.

State Farm argues that the facts alleged in Wigton’s complaint, even if proven, do not trigger coverage under the homeowners policy because her “bodily injury” was not caused by an “occurrence.” Wigton responds that the duty to defend was triggered when State Farm recognized that “there is a question whether Ms. Wigton is seeking damages because of bodily injury caused by an occurrence.” Failing that, she argues that the duty was triggered by the allegations of facts that, if proven, would result in coverage. Both arguments are compelling.

If an insurer equivocates on coverage, the purported absence cannot be so unequivocal as to obviate the duty to defend. Tidyman’s (Mont. 2014). State Farm recognized that a factual dispute existed as to whether the complaint alleged an accident. This is likely sufficient to show that the complaint “potentially implicated’ coverage. Id. But even if that is not dispositive, given State Farm’s immediate disavowal of coverage, such coverage is implicated by the complaint allegations.

Under the homeowners policy, “occurrence” means accident. To determine whether conduct was accidental rather than intentional, Montana applies a “two-prong objective standard, which first considers whether the act itself was intentional and, if so, then considers whether the consequences or resulting harm stemming from the act was intended or expected from the actor’s standpoint.” Wessel (Mont. 2020). “The second prong requires an objective inquiry to determine what could reasonably be expected to result from an intentional act.” State Farm argues that because it was not objectively reasonable for Murphy to believe that Wigton consented to his conduct, the harm she suffered was expected or intended and therefore not covered. There are facts that support a finding that their interactions were not consensual. For example, he apologized multiple times after the fact, was criminally charged, and offered to pay her $5,000 if she dropped the charges. But there are also pled facts that indicate that he has consistently taken the position that the relationship, and therefore his conduct, was consensual. For example, in his note offering to pay $5,000 he “again contended that the sexual encounters with Plaintiff were consensual.” He also pled not guilty to the charges and ultimately pled nolo. These allegations, considered in conjunction with the allegation of negligence, are sufficient to raise a dispute as to what a reasonable person in his position objectively expected. Lockard (9th Cir. 2019) (concluding after a bench trial that a reasonable person in the insured’s position could objectively expect his actions to cause harm to a victim of his sexual assault where the victim had consumed both alcohol and Ambien). Construing the complaint to resolve all doubt in favor of coverage, Staples (Mont. 2004), there was a dispute as to whether there was an “occurrence” as to trigger coverage. Further, the record is devoid of any indication that, after recognizing that “there is a question whether Ms. Wigton is seeking damages because of bodily injury caused by an occurrence,” State Farm made any effort to investigate the facts giving rise to that question. Montana law prohibits this sort of unilateral decision. Deck (Mont. 2016).

Nevertheless, in its denial letter State Farm further argued that even if the complaint alleged an occurrence, coverage is subject to the following exclusion:

a. Bodily injury or property damage:

(1) which is either expected or intended by the insured; or

(2) which is the result of willful and malicious acts of the insured;

b. bodily injury or property damage arising out of the business pursuits of any insured or the rental or holding for rental of any part of any premises by any insured.

While an insurer can rely on exclusions in making its duty to defend determination, Beaverhead (Mont. 2014), such reliance can be problematic as “exclusions ‘are frequently subject to challenge for ambiguity and inconsistency,’ and as a result ‘the mere existence of the exclusions does not establish an unequivocal determination that the claim does not fall within the insurance policy’s coverage.” Dowson (9th Cir. 2016); Newman (Mont. 2013). That is the situation here.

What was “expected or intended” from Murphy’s point of view is a fundamental dispute. And while it is undisputed that he was the manager of Wigton’s apartment and used that position inappropriately, State Farm’s denial letter does not explain how any bodily injury arising out of an assault “arose out of business pursuits” or the rental business. For example, as Wigton argued, it is not clear whether it believed the “rental” at issue was the Lakeview unit or the cabin where the first assault occurred. Ultimately, it is not sufficient under the “unequivocal demonstration” standard to simply state exclusionary language. PH&F (D.Mont. 2014) (“To the Court’s knowledge, the first time Great American raises notice in any meaningful way is in the Answer in this case.”). Nor can State Farm ameliorate that shortcoming with additional facts now.

Based on the complaint allegations, State Farm had a duty to defend under the homeowners policy.

The facts alleged in the complaint were likewise sufficient to trigger a duty to defend under the umbrella, which promises a defense if the insured is sued “because of a loss to which this policy applies.” State Farm admits in its denial letter that “there are claims being asserted which meet the policy definition of a loss, and therefore the insuring agreement of the [umbrella] is met.” As a result, its denial of coverage is premised entirely on certain exclusions which it believes “act as a complete bar to coverage.” (It reached this conclusion after deciding that the complaint did not allege an “occurrence.” Thus, even if the Court’s analysis on that issue is incorrect, “loss” under the umbrella is broader and would independently implicate coverage.)

State Farm’s reliance on exclusions in this context suffers from the same fundamental deficiency as that invoked under the homeowners policy: it is not enough to simply state the exclusionary language and imply that it applies to the facts. Newman. But even considering the exclusions under the alleged facts, they do not foreclose coverage.

State Farm invoked exclusions for “loss arising out of the alleged or actual (a) sexual harassment; (b) sexual molestation; or (c) discrimination prohibited by law;” “loss arising out of any insured’s business property or business pursuits;” “bodily injury or property damage which is (a) either expected or intended by the insured; or (b) the result of any willful and malicious act of the insured” and “personal injury when the insured acts with the specific intent to cause harm.” The last 3 exclusions do not foreclose coverage for the same reasons discussed as to the homeowners policy: there is a dispute as to whether the alleged conduct was consensual and whether it related to some sort of business pursuit or rental. And, again, the record is devoid of any evidence that State Farm actually investigated that dispute; it appears that it made unilateral conclusions to the detriment of its insured. An insurer is free to flesh out coverage issues by defending under a reservation and seeking a declaratory judgment, but it does not get to arbitrarily decide facts relating to coverage when the broader duty to defend is implicated. To hold otherwise would render the duty to defend meaningless.

In the context of the first exclusion, Wigton alleges that Murphy came into her apartment without permission and harassed her psychologically and physically before, during, and after the alleged sexual assaults. These allegations could implicate coverage under the definition of loss because she asserts that his actions resulted in “personal injury,” which encompasses injury “other than bodily injury.” Consequently to the extent that she claims emotional distress, mental anguish, mental distress, or mental injury, she alleges “personal injury” as a result of Murphy’s invasion of her home. Therefore, in addition to the fact that State Farm’s statement regarding the first exclusion is conclusory, it is also unsupported by the complaint allegations.

State Farm abandoned its insured in contravention of its contractual promise to defend, even if such defense was tendered under reservation. Where the duty to defend is triggered, the insurer must defend until relieved of that duty by court determination. It is a rare proceeding indeed where that duty is not implicated. State Farm took the risk of disclaiming a duty to defend at its peril. “There is always a risk in making unilateral coverage decisions,” RQR (D.Mont. 2014), and its gamble results in its liability for the $1.1 million State Court judgment.

Wigton v. State Farm Mutual Auto Ins., 44 MFR 247, 7/28/21.

Ann Moderie (Moderie Law Firm), Polson, and Britt Cotter (Cotter Law Office), Polson, for Wigton; David Rossmiller & Ellissa Boyd (Betts, Patterson & Mines), Portland, for State Farm.

CONTRACT: Claims that sculptor was deceived into accepting flat fees rather than royalties for horse figurine masters time-barred, not tolled by discovery, fraudulent concealment doctrines… bailment claim dismissed for failure to state claim… Christensen.

Phyllis Driscoll began sculpting figurines in 1996 for Kris & Ray Basta’s Singing Tree Farms. Singing Tree and Big Sky Carvers LLP merged in 1/00 to form Big Sky Carvers Inc. In early 2000, Kris Basta approached Driscoll about a new project that BSCI had with Montana Silversmiths. Driscoll agreed to create a horse sculpture for a flat fee. Basta told her that MSS did not pay a royalty. She said, “Montana Silversmiths will never pay a royalty on the horse sculptures. Don’t even ask because they will never pay a royalty.” Driscoll was accustomed to a royalty arrangement and said she would prefer a royalty rather than a flat fee. She asked Basta why MSS would not pay a royalty. Basta replied, “That’s just the kind of company Montana Silversmiths is.” In 4/00 Driscoll again asked if she could earn a royalty for the horse sculpt and Basta said, “No, this company will never pay a royalty, they just won’t, it’s Montana Silversmiths, they just will not pay a royalty.” Basta and other BSCI reps later repeated to Driscoll and her husband that “MSS does not pay royalties” and similar statements. Basta did not inform Driscoll that BSCI had entered into an agreement with MSS as of 1/00 in which BSCI agreed to provide services to develop a cowboy giftware line in exchange for an 8.5% royalty. This resulted in BSCI earning 8.5% on the sale of each of Driscoll’s horse sculpts. Each time Driscoll presented a horse sculpture to BSCI she was paid a flat fee and entered into a “Perpetual Grant of Reproduction Rights.” She understood that the rights she transferred to BSCI would be assigned to MSS as reflected in the bottom of each PGRR. Each PGRR provided: “Artists have been compensated in full for the Artist’s involvement in the Master and such Master shall not be, now or ever, subject to any royalty payments.”

In 5/11 Driscoll learned that MSS paid royalties to artists. She sued Defendants in 4/13 for fraud, constructive fraud, deceit, breach of the implied covenant, unjust enrichment, breach of contract/license, voidable title, bailment, copyright infringement, Lanham Act claims, and declaratory judgment. Defendants request summary judgment based on statute of limitations. Driscoll’s Statement of Disputed Facts, stretching over 53 pages, gives the erroneous impression that the material facts are hotly disputed. In reality, the relevant material facts for this motion are not in dispute and Driscoll’s Statement of Disputed Facts frequently exaggerates and unnecessarily complicates a straightforward set of undisputed facts.

It is undisputed that all of Driscoll’s claims are subject at most to an 8-year statute (2 years for fraud and other claims to 8 years for breach of contract or license). It is also undisputed that all alleged misrepresentations as to MSS’s royalty policy were between 2000 and 2004. Thus for Driscoll’s claims to be within any applicable period, tolling must be applicable.

Driscoll contends that the discovery rule should toll the periods on all of her claims until 2011 when she learned that MSS paid a royalty to artists for sculpts. “The discovery rule provides that a limitations period does not begin until the party discovers, or in the exercise of reasonable diligence, would have discovered, the facts constituting the claim.” Draggin Y (Mont. 2013). “However, this rule only applies when the facts constituting the claim are concealed, self concealing, or when the defendant has acted to prevent the injured party from discovering the injury or cause.” Id. The facts constituting Driscoll’s claims are not by their nature concealed or self-concealing. Basta represented that MSS did not pay a royalty, but Driscoll concedes that she never asked MSS whether it did or whether BSCI would receive a royalty for services it provided to MSS. (She provides no evidence that she would have been legally entitled to this information about the terms of the contractual relationship to which she was not a party.) Nor is there evidence that MSS would have concealed its royalty policy had she asked. In the end, Driscoll did not learn that MSS paid a royalty by uncovering some secret; she learned it through conversations with another artist and an MSS representative. It cannot be said that the truth about Basta’s representations was by its nature concealed or self-concealing. All she had to do was make a phone call to MSS and ask a simple question; “Does MSS ever pay a royalty?” It is not as if MSS was some shadowy company to which she had no access. She admits that she had its contact information all along. Nor did Defendants act to prevent her from discovering the facts underlying her claim. The best evidence she offers is that Basta told her, “Don’t even ask because they will never pay a royalty.” This is insufficient to toll the limitations period. She could still determine whether MSS paid a royalty simply by asking MSS. Basta did not tell her that MSS could not be contacted or attempt to obscure how it could be contacted. She had all the information necessary to discover the facts underlying her claim and the discovery rule does not apply. Nor does it matter that Basta repeated these misrepresentations. Driscoll had a duty to pursue discovery of the facts through reasonable diligence. Draggin Y; Osterman (Mont. 2003). Reasonable diligence in this arm’s-length business deal required Driscoll to go to the source and ask MSS whether it paid a royalty. Thus the statute was not tolled.

Driscoll also argues that the period is tolled by fraudulent concealment. “Fraudulent concealment consists of `the employment of artifice planned to prevent inquiry or escape investigation, and mislead or hinder acquisition of information disclosing a cause of action.” Cartwright (Mont. 1996); EW(Mont. 1988). But unlike Cartwright and other fraudulent concealment cases, there is no professional-client or similar relationship by which Driscoll was entitled to rely on the information about MSS’s royalty policy given to her by Basta. This was an arm’s-length transaction and Basta’s representations pertained to the royalty policy of some other entity. Driscoll was not entitled to rely on it in the same way an insured may rely on assurances from his agent about a confusing insurance policy, Cartwright, or a client is entitled to rely on assurances from his accountant about a complicated tax arrangement, Draggin Y. Driscoll knew from the beginning that she was dissatisfied with the arrangement. Consistent with most of her prior arrangements, she wanted a royalty and was not getting one. These circumstances were ample to trigger inquiry notice about Basta’s representations. Thus fraudulent concealment is inapplicable. Driscoll also contends that Defendants’ mere silence as to their royalty arrangement is sufficient to toll the statute. This theory is based on her unsupported allegation that a fiduciary relationship arose as a result of the “bailment relationship between Driscoll, as the bailor, and BSCI and MSS as the bailees.” She offers no evidence of any bailment relationship. In fact, the evidence is entirely to the contrary. She executed 25 nearly identical PGRR’s each time she presented a new sculpture to BSCI. The PGRRs assigned to BSCI “a perpetual exclusive right to … reproduce, manufacture, distribute, market, sub-license, reassign or otherwise use in any form thereof, the original piece of art,” and Driscoll was “compensated in full for [her] involvement in the Master and such Master shall not be, now or ever, subject to any royalty payments.” The contract also required her to “disclaim all rights of ownership to the Master, including ownership of copyrights, trademarks or other intellectual property associated with the Master.” Accordingly, Defendants owed no fiduciary duty such that mere silence could constitute fraudulent concealment.

Driscoll’s claim for bailment is also dismissed for failure to state a claim. Bailment generally requires one to return in proper condition the personal property that was “deposited” with them, or pay for any damages from wrongful use. MCA 70-6-201-214. The depositary must, “on demand,” return the property to the person who deposited it. There is no duty to deliver the property without a demand. §212; Gates (Mont. 1926); Viers (Mont. 1926). Driscoll’s complaint fails to allege that a demand was made by her or a refusal by any of the Defendants. Citing dicta from Viers, she contends that this omission is excused because she has alleged that the property was wrongfully acquired. However, the dicta is contrary to the requirement established by statute. Further, the PGRRs belie her complaint allegation that “her parting was temporary.” They granted a “perpetual exclusive” right of reproduction to BSCI, and Driscoll and her heirs “disclaim all rights of ownership to the Master.”

All claims dismissed with prejudice; the case is closed.

Driscoll v. Singing Tree Farms et al, 42 MFR 246, 2/11/15.

Julie McGarry (McGarry Law Firm), Bozeman, for Driscoll; Robert Lukes (Garlington, Lohn & Robinson), Missoula, for BSCI, Pierce, and Basta; Jean Faure (Faure Holden), Great Falls, and (formerly) Shane Coleman (Holland & Hart), Billings, for MSS and Group Montana.

ARBITRATION: Health care sharing ministry Member Guide is an insurance contract… Montana law prohibits arbitration clauses in insurance contracts and the McCarren-Ferguson Act reverse-preempts the FAA… HCSM providers’ motions to compel arbitration denied…. Haddon.

Plaintiffs’ claims.

Defendants sold catastrophic health coverage to Maria & Ron Moeller called CarePlus with a $10,000 deductible and 100% coverage of medical expenses after that deductible was met up to a $500,000 cap. They promised to cover expenses associated with cancer including chemotherapy. Defendants, covertly led by a man convicted of securities fraud and perjury but masquerading as an “ethical and religious” Christian sharing ministry, collected thousands of dollars in premiums from Moellers. In early 2019, more than a year after they left their Blue Cross plan to enroll in CarePlus Advantage, Maria was diagnosed with primary peritoneal cancer. She underwent chemotherapy and surgery, incurring more than $180,000 in medical bills. Defendants paid none of them. Instead they made bogus excuses that violated the written promises and terms of the CarePlus Advantage plan and ignored Plaintiffs’ appeals. Even after determining that they owed some part of the bills, they failed to make any payments, leaving hospitals and medical companies unpaid and Moellers exposed to severe financial harm as they fought a dreaded disease. They allege breach of contract, unfair claims settlement practices, fraudulent inducement, deceit, constructive fraud, negligent misrepresentation, common law bad faith, negligence, negligence per se in violation of §33-18-201 and common law to the extent that they should be found not to be an insurer within the meaning of §§ 33-18-242 and 33-1-201(6), breach of fiduciary duty, violation of the CPA, joint tortious enterprise, malice, promissory estoppel, equitable estoppel, and alter ego.

The Aliera Companies and Trinity Healthshare moved to compel arbitration. Hearing was held all day 4/12/21 and the morning of the next day.

Judge Haddon’s findings, conclusions, and order.

At issue is whether coverage and claim resolution disputes are subject to arbitration in Montana.

In 12/17, Ron Moeller applied for membership in Unity Healthshare LLC’s CarePlus Advantage health sharing plan administered by The Aliera Companies Inc. He and Maria were notified 12/17/17 that their membership was “active” and effective 1/1/18.

Unity functioned as a health care sharing ministry which marketed “plans” that were asserted to be exempt from healthcare insurance requirements of the ACA and by which members agreed to share in eligible medical costs and that, in several ways, functioned like traditional insurance.

Moellers moved from Texas to Helena in 3/18 and monthly “contributions” to Unity were continued.

Aliera emailed Moellers in late 2018 that it would be changing their HCSM provider to Trinity Healthshare but the plan would otherwise remain the same and “no action is needed” by Moellers. They received from Aliera a “2018-2019 Trinity Member Guide” which differed substantially from the Unity Member Guide including a mandatory and binding dispute resolution provision.

Trinity was chartered as a non-profit corporation in 6/18. Like Unity, it claimed to provide health sharing memberships administered by Aliera.

Contributions to the Trinity plan were to be used in part to pay covered medical expenses. Trinity previously conducted activities as “Trinity Healthshare.” It now operates under the name “Sharity Ministries Inc.

On 1/13/19 Aliera emailed Moellers that “until further notice” they were “not being transitioned to Trinity” and “your plan will remain a Unity HCSM plan at this time.” This statement in substance withdrew any offer by Aliera and Trinity to transition Moellers to coverage by Trinity.

Moellers took no action in response to receipt of the 2018-19 Trinity Member Guide or any other communications from Aliera, Unity, or Trinity through 1/13/19. No offer was made after 1/13/19 by Aliera or Trinity for Moellers to transition from Unity to Trinity nor was any such offer from Aliera or Trinity accepted by Moellers.

Aliera’s late 2018 email statement that “nothing changes on your plan except for the HCSM name” was flawed, inaccurate, and contained misrepresentations of fact.

26 USC 5000A(d)(2)(B) requires that an entity claiming to be an HCSM, or a predecessor entity, have existed and functioned “continuously and without interruption” since at least 12/31/99. Trinity did not exist 12/31/99. It does not qualify and never has qualified as an HCSM and could not claim to be such an entity when chartered in 6/18.

Moellers received an email from Aliera 4/30/19 stating: “Aliera is no longer selling your current health plan with the Aliera Healthcare/Unity HealthShare, LLC component” and “an affordable, seamless option – with the same benefits and services – exists.” On 5/2/19 Ron Moeller executed a Plan Update Authorization Form which stated: “I hereby authorize Aliera Healthcare to change my current Aliera/Unity plan to an equivalent Aliera/Trinity plan.”

Neither the 4/30/19 email from Aliera nor the 5/2/19 Plan Update Authorization Form executed by Moeller contained any reference to arbitration of contract disputes, or to the terms, conditions, content, or identity of any specific member guide, or to any of the many differences between the Unity Member Guide and the 2018-19 Trinity Member Guide.

Aliera emailed Moellers 6/18/19 of their transition from the Unity plan to a Trinity plan effective 6/1/19. Moellers then made monthly “contributions” to Trinity/Aliera while enrolled with Trinity until membership terminated 12/31/19. Unity Healthshare is not named as a party in this case, has not appeared as such, and is not before the Court.

It is also worthy of note that on 6/22/21 Northern Dist. Georgia Judge Amy Totenberg in a factual and legal issue setting remarkably similar to this case issued a thoughtfully reasoned and exhaustive Opinion & Order holding that Trinity did not qualify as an HCSM under the ACA, the contracts were contracts of insurance, and the contracts were not subject to mandatory resolution of disputes by arbitration.

Moellers’ execution of the Plan Update Authorization Form was not acceptance of an offer to contract for the plan in the 2018-19 Trinity Member Guide or the 2019 Trinity Member Guide. Any offer extended by Aliera and Trinity and based on the 2018-19 Trinity Member Guide had been withdrawn by Aliera’s and Trinity’s 1/13/19 email and had not been re-extended. Moellers never took any steps or action that expressed a willingness to accept the 2018-19 Trinity Member Guide plan. Moreover, there is no evidence that they ever received the 2019 Trinity Member Guide plan or that they accepted it.

Incorporation of an arbitration clause into the contract would have fundamentally altered the dispute resolution process, would not have offered the same benefits and services as the Unity plan, and would not have been “equivalent” to the Unity plan. The fundamental components of an offer and acceptance of the 2019 Trinity Member Guide plan were never agreed on.

The 2019 Trinity Member Guide was — notwithstanding disclaimer by Aliera and Trinity — an insurance contract (plan) under Montana law. Insurance in Montana is defined as “a contract through which one undertakes to indemnity another or pay or provide a specified or determinable amount of benefit upon determinable contingencies.” The terms contained language by which members paid a premium to be used along with premiums paid by other members to pay for eligible medical costs for members. Trinity maintained exclusive control over what medical costs qualified for payment and how premiums were to be distributed. The 2019 Trinity Member Guide evidenced a contract by which members paid premiums and Trinity indemnified them for determinable amounts upon determinable contingencies.

Trinity nevertheless asserts that the 2019 Trinity Member Guide contract was not a contract of insurance because Trinity is an HCSM and therefore exempt from insurance regulation. However, it does not and cannot qualify as an HCSM and it cannot avoid the determination by such an assertion that the contract is a contract of insurance.

Montana law prohibits arbitration of an insurance contract. MCA 27-5-114(2)(c). Defendants claim that the statute is both unconstitutional and preempted by the FAA. Both assertions are wrong.

The FAA directly conflicts with the McCarran-Ferguson Act which states that “no Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance unless such Act specifically relates to the business of insurance.”

The 9th Circuit has not spoken directly, by published opinion, to whether the MFA does reverse preempt the FAA with regard to state statutes that prevent arbitration of insurance contracts. Several other Circuits have consistently concluded that the MFA does reverse preempt application of the FAA in such cases. Moreover, the 9th Circuit, in an unpublished opinion, Technical Security Integration (9th Cir. 2018), held that the MFA reverse preempts the FAA. Precedent in opinions of other Circuits and guidance from Technical Security Integration are persuasive.

The plain specific language of the MFA reverse preempts application of the broad language of the FAA to Montana law barring arbitration clauses in contracts of insurance. The Montana statute is constitutional and — contrary to the FAA — applies to prohibit arbitration of insurance contracts in Montana.

It is an unfortunate reality that this case as now postured presents and leaves unanswered numerous significant issues, several of which have not been raised by the parties, that must be resolved before the case is positioned for merit disposition, including how this Court could lawfully consider or decide any contract dispute between Moellers and Unity — not a named party in this case — involving the Unity Healthshare CarePlus Advantage health sharing plan and whether either the 2019 Trinity Member Guide or the 2018-19 Trinity Member Guide would — without a final, valid, and specific ruling that binding resolution of disputes by arbitration was mandated and was a valid component of the contract — support a conclusion that a binding HCSM contract between Moellers and Trinity ever existed.

Ordered:

Moellers did not accept an offer to enter into a contract containing a binding arbitration clause, did not enter into a contract containing a binding arbitration clause, and are not parties to a contract containing a binding arbitration clause.

Trinity Healthshare’s motion to compel arbitration or dismiss claims and stay remaining litigation is denied.

Aliera’s motion to compel arbitration is denied.

Moeller v. The Aliera Companies, Trinity Healthshare, Timothy Moses, Shelley Steele, and Chase Moses, 44 MFR 245, 6/30/21.

John Morrison & Anne Sherwood (Morrison Sherwood Wilson Deola), Helena, for Moellers; Stefan Wall (Wall, McLean & Gallagher), Helena, Sara Craig (Burr & Forman), Tampa, and Elizabeth Shirley (Burr & Forman), Birmingham, for Aliera, Steele and Chase Moses; Nathan Schacht (Baker & Hostetler), Denver, and Jeffrey Baxter & Jacqueline Menk (Baker & Hostetler), Atlanta, for Trinity; Nathan Bilyeu & Sean Slanger (Jackson, Murdo & Grant), Helena, for Timothy Moses.