ATTORNEY DISCHARGE: No Montana personal jurisdiction over wrongful discharge suit by Texas law firm attorney who moved to Montana to work out of his home… case transferred to Texas Federal Court rather than dismissed… Molloy.

Roberts Markel Weinberg Butler Hailey is a law firm with 4 locations in Texas. In 2018 it hired Shawn Isakson, who lived in Texas, as business manager. In 2019 he became the CEO. (The Firm alleges that this was a title that he bestowed upon himself; he claims he was appointed by the Board of Directors.) He directly supervised 4-6 employees including 2 full-time permanent remote employees in Colorado and Illinois. In 7/20 he began working remotely from Whitefish. Several other executives worked remotely, either full-time or part-time, from their homes in Colorado, Illinois, or Texas without a primary office location.

Isakson moved to Whitefish during COVID for personal reasons unrelated to the Firm’s practice of law. He claims the Firm was aware that his move was permanent; the Firm maintains that it treated his remote work from Montana as temporary because he had assured that he still owned a home in Houston, he would be moving back to Houston, and his wife’s employer may also require her to return to Houston. It maintains that not only was his move to Montana neither required by nor a benefit to the Firm, it was not even “approved.” However, as apparently required by IRS guidelines pertaining to temporary work locations, in 11/21 the Firm updated his employment record to reflect a full-time remote status with his Montana address and began deducting Montana payroll taxes, paying Montana unemployment taxes, and providing work comp and employer’s liability insurance for his home office in Montana. In 11/22, the Firm’s VP Jeff Roberts terminated his employment during a phone call while Roberts was in Texas and Isakson was in Montana.

In 11/23 Isakson sued the Firm pursuant to Montana’s WDEA. The Firm moved to dismiss all claims for want of personal jurisdiction. At the conclusion of a hearing 3/14/24 the parties were asked to be prepared to discuss transfer of venue and related conflict of law issues at the preliminary pretrial conference the next day. At the 3/15 conference Isakson argued that the case should stay in Montana because it has personal jurisdiction over the Firm and, because the WDEA provides specific protections for employee-employer relations, Montana has the stronger interest. The Firm countered that Texas has the stronger interest because its laws protect employers by providing them the freedom & flexibility of an at-will system. The Court ordered supplemental briefing on conflict of law and choice of law issues raised at the conference.

The parties do not dispute that the Court lacks general personal jurisdiction over the Firm but disagree as to whether it had sufficient minimal contacts with Montana to support a finding of specific personal jurisdiction. Isakson asserts that such jurisdiction exists because the Firm “purposefully” employed him in Montana, paid Montana taxes, had a Montana-based work comp and employer’s liability policy, occasionally conducted business in Montana, and “engaged in conduct that resulted in the accrual of a tort action in the State of Montana, thereby injecting itself in multiple ways into the affairs of the State of Montana.”

Isakson insists that the requirements under Montana’s long-arm are met under Rule 4(b)(1) because the Firm transacted business in Montana under (A), committed an act resulting in a tort action under (B), and contracted to insure a person, property, or risk located in Montana under (D).

Neither side presents authority establishing a clear definition of “transaction of any business” in Montana. Isakson cites Prentice Lumber (Mont. 1970) for the proposition that there is a “prevailing trend” to interpret what constitutes conducting business broadly. However, under more recent precedent the Montana Supreme Court explained the factors that show a defendant was transacting business within Montana are the same as the factors that would support general jurisdiction, albeit to a less exacting standard. These factors include the defendant’s “local negotiations for various types of commercial transactions, the solicitation of business within the state, prior litigations in the forum, the presence of agents in the state, and the existence of ongoing contractual relationships with residents of the forum state.” Milky Whey (Mont. 2015) (quoting Wright & Miller).

Isakson argues that because he was employed in Montana, other employees of the Firm occasionally conducted business in Montana, and the Firm paid taxes and insured him in Montana, the Firm was transacting business within the meaning of Montana’s long-arm statute. He further relies on the fact that the Firm bought and still owns his computer and networking equipment and paid for his internet access. He also points out that he personally “transacted and solicited a great deal of corporate business” for the Firm from his home office in Montana.

The Firm counters that Isakson takes “significant liberties” with the facts in his affidavit. It argues that its only business is practicing law which it does exclusively in Texas and the work that Isakson performed — banking, payroll, hiring and managing employees, and paying vendors — was incidental to its practice of law, not its “business.” It asserts that any employees he claims “worked” while in Montana were on vacation. It points out that IRS guidelines require employers to pay taxes and insure even temporary remote workers once they have been working in another state for more than 1 year, and following such requirements is not enough to confer personal jurisdiction. In sum, it maintains that it did not transact business in Montana as to invoke jurisdiction because it did not hire Isakson in Montana, it did not seek to expand its business into Montana, his remote work location was a unilateral and unapproved decision by him, and his work itself is only ancillary to the Firm’s business. The Firm is correct.

Unlike in Prentice where the parties engaged in the interstate sale of lumber, the Firm is not engaged in the practice of law in Montana. It has never employed a Montana-licensed attorney, practiced law in Montana, or planned to generate legal work in Montana. Nothing in Isakson’s affidavit contradicts the Firm’s statements that it has never solicited business in Montana, negotiated locally to further its business in Montana, or had any clients, financial accounts, or other contractual relationships with Montanans, other than those directly linked to his remote location in Montana. Although the parties dispute whether any of the Firm’s other employees conducted business in Montana and the benefit of the doubt goes to Isakson, LNS (9th Cir. 2022), employees checking email and Isakson’s management team having work-related conversations at his home in Whitefish do not rise to “transacting business.” Many modern companies have out-of-state meetings and/or corporate retreats and employees often engage in important work-related conversations while traveling or for any number of reasons. These incidental contacts are insufficient to show that the Firm transacted business in Montana for the purposes of specific personal jurisdiction under 4(b)(1)(A).

Isakson next argues that personal jurisdiction is proper under (B) which extends jurisdiction over “the commission of any act resulting in accrual within Montana of a tort action.” The Firm argues that a WDEA claim cannot give rise to jurisdiction under (B) because it is a statutory claim that preempts other torts related to wrongful discharge. The Montana Supreme Court does not appear to have answered that question, but even assuming that a WDEA action is a tort action under the long-arm statute, jurisdiction would be improper.

The test for whether a tort accrued in Montana is “highly fact specific and dependent on the nature of the alleged tort at issue.” Groo (Mont. 2023) (tort accrued in Montana where a New York social media user directed a negative campaign at a Montana business and its customers). The inquiry “focuses on where the events giving rise to the tort occurred, rather than where the plaintiffs allegedly experienced or learned of their injuries.” Tackett (Mont. 2014). “Jurisdiction is not acquired through interstate communications solely by signing a contract to be performed in another state.” Groo; Cimmaron (Mont. 2003) (“Interstate communication is an almost inevitable accompaniment to doing business in the modern world, and cannot by itself be considered a contact for justifying the exercise of personal jurisdiction.”); Threlked (Mont. 2000) (no long-arm jurisdiction existed where the defendants’ interstate communications related entirely to services to be performed out-of-state).

While no Montana case is on all fours with this case, the reasoning in Bird (Mont. 1995) is persuasive. It held that Montana courts lacked personal jurisdiction over an Idaho attorney because, although he had communicated with his clients in Montana, the alleged fraud and deceit accrued in Idaho where he agreed to represent the Montanans for their claims arising out of an auto accident in Idaho.

Isakson’s claims center on his allegedly wrongful termination which Roberts, acting as an agent of the Firm from his office in Texas, performed over the phone. The termination targeted Isakson in Montana and was experienced by Isakson in Montana. However, the acts giving rise to the termination — both the Firm’s decision to terminate him and all of Isakson’s actions while working for the Texas-based Firm — occurred in Texas or were directed toward operating a business solely in Texas. Isakson was hired by the Texas Firm while he was a resident of Texas and even after his move to Montana he worked to advance its legal business in Texas. Under Montana law, any tort connected to his termination accrued where the events that gave rise to it occurred — in Texas. 4(b)(1)(B) does not confer specific jurisdiction over the Firm.

Isakson’s next argument is that jurisdiction is proper under (D) because his wrongful discharge claims arose from the Firm “contracting to insure any person, property, or risk located within Montana at the time of contracting.” He argues that after he had been working remotely from Montana for 1 year the Firm secured a Montana employer’s liability and work comp policy for him at his Montana address. The Firm disagrees that (D) applies because his termination claim is not connected to the policy, which covers an employee’s “bodily injury by accident or bodily injury by disease” and excludes “termination of any employee.” The Firm is correct.

The parties agree that “arising from” in this context means a “direct affiliation, nexus, or substantial connection between the basis for the cause of action and the act which falls within the long-arm statute.” Seal (Mont. 2002). At issue in Seal was whether a judge erred in deciding the merits of an insurance claim during a jurisdictional dispute. The plaintiff alleged that the defendant failed to fulfill her “contractual duty to insure the goods against loss or damage and he suffered a loss as a result of that breach.” Seal determined that personal jurisdiction was appropriate under (D) because “at their core, the allegations in the complaint derived from the alleged acts.”

Conversely, Isakson’s claims stem entirely from his allegedly wrongful termination. He does not allege any breach of the insurance policy and the policy excludes coverage for any damages arising from the “termination of any employee.” The mere fact that it covered him and his remote work location in limited ways is insufficient to create a substantial connection to his wrongful discharge claim. 4(b)(1)(D) cannot be used to establish personal jurisdiction over the Firm.

As Isakson has failed to establish specific personal jurisdiction under Montana’s long-arm statute, the Firm’s motion to dismiss could be granted for that reason alone. Milky Whey. However, even if he had satisfied one of the Rule 4(b)(1) conditions, the exercise of personal jurisdiction must also comport with due process. FMC (US 2021). The Firm argues that it neither availed itself of the benefits of Montana’s laws nor did it purposely direct any activity toward Montana. It maintains that “Isakson was hired in Texas, lived in Texas, and worked in Texas until he unilaterally ‘moved’ to Montana temporarily due to COVID-19.” Isakson counters that it purposefully availed itself of the benefits & protections of Montana laws and directed activity toward Montana when it terminated him here because it was a voluntary act designed to have an effect in Montana. The Firm has the better argument.

Taking Isakson’s factual allegations as true, the Firm withheld Montana taxes related to his employment, obtained insurance for him, and engaged in interstate communication with him related to his job. This distinguishes his case from where the defendant’s relationship with the forum state was predominantly to impact the market of the forum state. Sinatra (9th Cir. 1988) (a Swiss clinic’s tortious conduct was partly intended to avail it of California’s market). But the fact that the Firm never attempted to avail itself of Montana’s market for legal services weighs against finding that it “expressly aimed” any actions at Montana. Every connection between Montana and the Firm — including Isakson’s occasional hosting of Firm employees — was the result of his decision to move there and all are the sort of “random, fortuitous, or attenuated contacts” that under Burger King (US 1985) are insufficient to establish specific personal jurisdiction. Although he lives in Montana, his “injury is entirely personal to him and would follow him wherever he might choose to live or travel”; thus “the effects of [the Firm’s] actions are ‘not connected to the forum State in a way that makes those efforts a proper basis for jurisdiction.'” Picot (9th Cir. 2015) (quoting Walden (US 2014).

Because Isakson has neither established a prima facie showing of specific personal jurisdiction over the Firm under Montana’s long-arm statute nor one that comports with due process, the Court lacks personal jurisdiction over the Firm.

In response to the Firm’s motion to dismiss, Isakson requests that he be allowed to conduct discovery so he may further develop the jurisdictional evidence. The Firm argues that because his temporary remote work location was its only tie to Montana, jurisdictional discovery is not necessary.

Isakson’s allegation that he conducted business on the Firm’s behalf in Montana where his home functioned as a satellite office for the Firm provides a colorable basis for personal jurisdiction, but he fails to proffer specificity about what he would hope to learn through discovery. Merely pointing to existence of a jurisdictional dispute and arguing that discovery may uncover further evidence is insufficient to justify jurisdictional discovery.

Although the Court lacks personal jurisdiction over the Firm, transfer, rather than dismissal, is appropriate. 28 USC 1406(a). A transfer would not cause hardship to the Firm and its position on the merits would not be prejudiced, while a transfer would allow Isakson to obtain personal jurisdiction over the Firm while alleviating the procedural burdens related to the cost of refiling a suit in Texas Federal Court and any statute of limitations concerns that might apply to his potential cause(s) in Texas. Additionally, a transfer under 1406(a) does not prejudice any choice of law analysis to be determined by the Texas court.

Isakson v. Roberts Markel Weinberg Butler Hailey, 45 MFR 2, 4/9/24.

Anne Sherwood & Frederick Sherwood (Morrison, Sherwood, Wilson & Deola), Helena, for Isakson; Jean Faure & Katie Ranta (Faure Holden), Great Falls, for RMWBH.

INSURANCE: Coverage of $3.76 million net verdict for defectively designed & constructed disappearing floor pool at residence precluded by CGL business risk and professional liability exclusions… Molloy.

Insurance. An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table. The Devil’s Dictionary, Ambrose Bierce.

So it is with the case before the Court, the balance of the insured’s comfort measured against the words of the insurance policy. This dispute arises out of construction of a “disappearing floor” pool at a residence on Big Mountain. What is at issue is whether Nautilus has a duty to indemnity Michael & Robin for the millions in damages awarded by jury. Because several exclusions bar coverage, summary judgment is granted for Nautilus.

Farrens engaged Rock & Water, an Idaho-based LLC that designs & builds swimming pools and water features, in 2014 to construct a floating or disappearing deck/floor pool & spa with features such as an infinity edge, a basin to catch the water overspilling the edge, a moveable & disappearing pool & spa deck, a waterslide, and a fire pit. Construction began in 2015 and ended in 2018. Because Rock & Water had not built a floating floor pool, to avoid paying an engineer, its owner Sean Henry designed a ballast-tank system based on information he found on YouTube. Although the system’s operation is disputed, the general idea was that the tanks would fill with air and make the floor float to create a deck and then fill with water and sink to reveal the pool. The tanks and frame used to lift the floor were made of aluminum and the floating floor was made of Ipe wood.

Although many aspects of the pool and deck were completed in 7/16, there were immediate problems with the floating floor. It would not raise or lower evenly and therefore jammed inside the pool shell, damaging the shell and wood flooring. The aluminum tanks began to corrode due to contact with chlorine. 15,000 gallons of water were released down the hill below the pool every time the floor was moved, eroding the soil and requiring installation of riprap.

Farrens sued Rock & Water in State Court in 11/18. Nautilus provided a defense under reservation. Following a 4-day trial in 3/22, the Kalispell jury awarded Farrens $4.5 million for repairs and found them 20% contributorily negligent. It also awarded $100,000 for loss use and $100,000 for emotional distress. Judgment was entered against Rock & Water in the amount of $3.76 million in damages and $11,976.49 in costs.

Rock & Water was insured 2016-18 by a Nautilus CGL policy with $2 million General Aggregate Limit (other than products/completed operations) and $1 million limit occurrence. Under the 2016 and 2017 policies, the “products/completed operations aggregate limit” is stated as “$INCLUDED.” For the 2018 policy it is stated as $2,000,000.” Farrens offered to settle for the $1 million limits twice prior to trial.

Nautilus filed this case in 12/22 seeking a declaration that there is no coverage under the policies and therefore no duty to indemnify, and that even if coverage was triggered, a number of exclusions apply. Farrens counterclaimed seeking a declaration that Nautilus has a duty to indemnify and that because it acted in bad faith in failing to settle for policy limits it is obligated to pay the judgment in excess of the limits. The parties moved for summary judgment. Farrens moved to dismiss their bad faith counterclaims.

Coverage is triggered only if there is “bodily injury” or “property damage” caused by an “occurrence.” Nautilus argues that there is no coverage because the damage was the product of defective workmanship, which is never considered an occurrence, and the damage was exclusively to Rock & Water’s work product. Farrens argue that because an occurrence includes intentional acts with unexpected results, it can apply in circumstances such as here.

Nautilus relies primarily on Phoenix Ins. v. Boland Const. (D.Mont. 2017) which involved construction delays caused by a subcontractor and which the Court stated that “Montana federal courts, applying Montana law, have concluded that defective workmanship is not considered an ‘occurrence’ under the insuring language of a CGL policy.” But no further analysis was provided, and while Phoenix cited 2 federal district court decisions, neither bolsters Nautilus’s argument.

Because there appears to be no dispute that Rock & Water’s installation of the floating pool system and its components — such as the aluminum — was an intentional act, the dispositive inquiry under Fisher (Mont. 2016) is whether it intended or expected Farrens’s damages. Applying an objective standard, the record shows that it did not intend or expect its floating floor to cause the damage. It is undisputed that Henry did not anticipate that the floor would bind when it was raised or lowered, which damaged the mechanism, the pool shell, and the Ipe wood flooring. It is also undisputed that he did not research the effect that chlorine would have on the aluminum components which caused additional damage to the spa frame and hydraulics. Although the parties disagree whether the lift system caused the pool epoxy to delaminate or whether the epoxy was simply the wrong product for this job, that damage was equally unexpected and unintended. Indeed, Rock & Water contacted the epoxy manufacturer who stated that it was not the application that caused the problem, but rather the coating had failed on other jobs in Montana.

Because Farrens’s damages arose from the unanticipated and unexpected consequence of Rock & Water’s design and work, its installation of the floating floor and its components constitutes an “occurrence” triggering coverage.

Exclusion j(5) excludes coverage for “property damage to that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations.” Nautilus argues that the damage to the pool, spa, and water features is excluded because it occurred when Rock & Water was performing operations on or immediately adjacent to them. Farrens respond that “particular part” is limited to the discrete project component, not the pool area as a whole. Nautilus counters that while “particular part” is narrower than the residence, it encompasses the entire pool area in which all of Rock & Water’s work was performed. Nautilus has the better argument.

Fortney (6th Cir. 2010) held that “particular part” means “the distinct component parts of a building — things like the interior drywall, stud framing, electrical wiring or the foundation.” However, it relied on JHP (5th Cir. 2009) which focused on the fact that the faulty exterior work and retaining walls “were distinct component parts that were each the subject of separate construction processes and are severable from the interior drywall, stud framing, electrical wiring, and wood flooring.” That is not the case here. The pool shell, aluminum tanks, spa frame, and deck floor were all part of the floating floor pool system upon which Rock & Water continued to perform work until 4/18. Thus the alleged property damage was to the particular part of real property that was the direct focus of its continued operation. Coverage is therefore excluded under j(5).

Exclusion j(6) precludes coverage for “property damage to that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” “Your work” is defined as Rock & Water’s “work or operations,” “materials, parts or equipment furnished in connection with such work or operations,” or “warranties and representations made at any time with respect to the fitness, quality, durability, performance or use of ‘your work.'” Nautilus argues that this applies because “all of the awarded damages were to replace Rock & Water’s own work product (or the materials, parts and equipment used in connection with that work) because Rock and Water’s work was done incorrectly.” Farrens quibble in response that there were completed, properly installed portions of the project that were damaged: the pool shell; the aluminum tanks, frame, and hydraulic cylinders; and the Ipe wood decking. Nautilus has the better argument.

Rock & Water designed & installed all of the pool components and they needed to be replaced because of its design decisions and material choices. It installed the aluminum components without protecting them from the chlorine in the pool. While Farrens may be correct that aluminum can be used in some pools in some situations, it is undisputed that Rock & Water’s submersion of the untreated aluminum in chlorine caused it to corrode and degrade. As argued by Nautilus, “your work” includes the materials used in connection with the insured’s operations. This falls within the definition of “your work.” Similarly, as it relates to the Ipe wood decking, while Farrens may be correct that wood flooring can be an appropriate decking material in Montana, its repeated submersion under the pool water and its removal and replacement by Rock & Water while it was troubleshooting the pool lift system damaged the floor. This product was therefore once again damaged by Rock & Water’s faulty operation of the floating floor and use of the wrong material. While the pool shell is a closer question, it also falls within this exclusion as even if the epoxy was an appropriate material in some pool contexts, Rock & Water installed a component that did not stand up to the repeated raising and lowering of the nylon wheels that caused the pool shell to scar.

Farrens again unsuccessfully try to separate out the failures of what they call the “floating pool floor” from its component parts. Because the alleged property damage was a result of “your work” by Rock & Water, coverage for those damages is excluded under j(6).

The 2016 policy’s Professional Liability Exclusion excludes coverage for property damage “arising out of the rendering of or a failure to render any professional services by you, but only with respect to your providing engineering, architectural or surveying services in your capacity as an engineer, architect or surveyor.” “Professional services” includes “preparing, approving, or failing to prepare or approve shop drawings, opinions, reports, or drawing and specifications” and “supervisory or inspection activities performed as part of any related architectural or engineering activities.” The 2016 policy further states that “this exclusion does not apply to your operations in connection with construction work performed by you.” This exclusion impacts later policy years as the 2017 and 2018 policies define “property damage” to include the “continuation, change or resumption” of property damage and state that if the insured was aware of the property damage prior to the policy period, the “continuation, change or resumption” of that property damage “during or after the policy period will be deemed to have been known prior to the policy period.”

Farrens insist that “Nautilus submitted no evidence that Rock and Water acted in the capacity of an engineer, architect, or surveyor.” They also emphasize that Altius Design Group was the architect and that under the construction agreement an independent engineer was to be consulted. They argue that the exclusion requires the rendering of “professional services,” claiming that Rock & Water rendered no such services. Nautilus responds that the record shows that Rock & Water designed all of the faulty elements and “the fact that Rock and Water lacked the credentials to make these types of design and engineering decisions does not render the exclusion inapplicable. Nautilus has the better argument.

Under the plain language of this provision, coverage is excluded when a contractor acts in the capacity of an engineer or architect. As contended by Nautilus, that necessarily includes Rock & Water’s design of all the pool components that were designed & built here. Indeed, while it may have contracted only to build the pool, it is undisputed that its owner Sean Henry “said he would design the pool himself.” He then did so. (“Based on this YouTube video, Rock and Water designed a ballast tank system that consisted of nine tanks that were seven feet wide and two feet deep.”) (Emphasis added).) The fact that Henry was not qualified to perform this design or engineering function does not change the undisputed fact that he did. While Farrens may be correct that the “professional” component of these services was questionable considering that he copied an idea from YouTube, that does not alter applicability of the policy terms. He prepared drawings of the pool and a detailed list of structural components. Further, the pay schedule notes that the first 20% of the pool cost included “completion of engineering” that would “be completed in R&W WHSE.” Thus the fact that Rock & Water was not qualified to render the professional services it provided does not void application of this exclusion.

Finally, Farrens argue that per its plain terms this exclusion does not apply to Rock & Water’s construction activities. While that argument is persuasive on its face, it again fails to recognize the services that were provided. Farrens correctly note that Rock & Water performed the physical labor and installed the component parts that comprise this project. But those activities did not give rise to Farrens’s damages. The “construction exception” to the exclusion is meant to insulate a contractor from competently executing a design error when it was not responsible for that design. But Rock & Water competently installed a pool that it poorly designed itself. The professional liability exclusion bars coverage.

Nautilus takes the position that there is no coverage for the hillside erosion caused by repeated draining of the pool because the policies contain a subsidence exclusion. It excludes coverage for property damage “directly or indirectly arising out of, resulting from, contributed to, aggravated or concurrently caused by subsidence or movement of soil, land, bedrock or earth, whether natural, manmade or otherwise.” “Subsidence or movement of soil, land, bedrock or earth” includes but is “not limited to settling, bulging, shaking, sinking, slipping, shifting, eroding, rising, tilting, expanding, contracting, shrinking, instability, falling away, caving in, landslide, mudflow, flood, sinkhole, earthquake, volcano, or avalanche.” Nautilus argues that the “erosion damage” alleged by Farrens is excluded under this provision. Farrens insist that this exclusion is limited to “damage caused by erosion” as opposed to the situation here where the erosion itself is the damage. They have the better argument.

Coverage is excluded if the alleged property damage is caused by subsidence, natural or manmade. It is undisputed that a substantial amount of water ran down the hillside whenever the vanishing basin edge was full and Rock & Water attempted to move the floating floor. This flooding caused the soil below the pool to erode. Thus it is not the case where erosion of the hill below the pool caused damage to the pool foundation; rather, as Farrens argue, the subsidence is the damage. This exclusion does not bar coverage for the hillside erosion.

However, Nautilus further argues that there is no coverage for the erosion because the jury awarded no repair costs related to the hillside. Farrens argue that the jury award includes all of their losses associated with the project and if Nautilus wanted the jury to distinguish between covered and noncovered damages it could have requested special interrogatories on the verdict form. Although Nautilus responds only to the first argument, it prevails.

Farrens are generally correct that an insurer waives its right to itemize covered and noncovered damages when it fails to ask for an allocation of damages. But this is not the case where the jury heard evidence on both covered and noncovered claims and Nautilus is now asking the Court to allocate lump sum damages among those claims. Cf. Automax Hyundai (10th Cir. 2013) (“Damages are presumed to be covered unless the insurer can demonstrate an appropriate allocation.”) It is undisputed that this jury heard no evidence regarding the repair cost or cost of loss of use associated with the hillside erosion. Thus while Nautilus has the duty to indemnify Farrens for damages associated with the hillside erosion, no such damages were awarded.

Although Farrens originally pled that Nautilus acted in bad faith and is therefore on the hook for damages beyond the $1 million policy limits, they moved to dismiss those counter-claims. The issue is now moot based on the Court’s finding of no coverage. Steadele (Mont. 2011) (“Where an insurance policy excludes coverage, a third party’s bad faith claim fails as a matter of law.”).

Summary judgment is granted for Nautilus.

Nautilus Ins. v. Farrenses and Rock & Water, 45 MFR 1, 3/1/24.

Randall Colbert & Emma Mediak (Garlington, Lohn & Robinson), Missoula, and Linda Hsu (Selman Leichenger Edson Hsu Newman Moore), San Francisco, for Nautilus; Sean Frampton (Frampton Purdy Law Firm), Whitefish, for Farrenses.

INSURANCE: Insurer failed to unequivocally demonstrate that UTV was not designed for operation principally on public roads and could never be a Covered Auto, now liable for $1.6 million consent judgment plus interest and attorney fees for failure to defend rollover injury claim rather than only $25,000 policy limit it would have risked had it filed declaratory action… Watters.

Sully Weinreis bought a 2017 Can-Am Maverick X3 UTV 4/2/21. The next day he was driving it with Benjamin Fettkether in the passenger seat when he took a turn too fast and rolled. Fettkether’s right hand was crushed and degloved. He is now 38.

Weinreis had a Progressive policy that provided up to $25,000 for any accident involving a “Covered Auto” including any “Auto” listed on the declarations page and any “Additional Auto.” The declarations page lists a Silverado and a Mustang.

“Additional Auto” is defined as “an auto the insured becomes the owner of during the policy period that does not permanently replace an auto shown on the declarations page if: a. Progressive insures all the other autos the insured owns; b. the additional auto is not covered by any other insurance policy; c. the insured notifies Progressive within 30 days of becoming the owner of the additional auto; and d. the insured pays any additional premium due.”

An “Auto” is a “land motor vehicle: a. of the private passenger, pickup body, or cargo van type; b. designed for operation principally upon public roads; c. with at least four wheels; and d. with a gross vehicle weight rating of 12,000 pounds or less, according to the manufacturer’s specifications.” If a vehicle meets the definition of an additional auto it is a Covered Auto.

Fettkether sued Weinreis for negligence in 13th Judicial District Court and demanded the $25,000 bodily injury limit. Progressive rejected the demand 12/9/21 and refused to provide Weinreis a defense on grounds that the X3 was not an Auto because, according to the owner’s manual, it is not designed for operation principally on public roads. It noted that the manual described it as an “Off-Road” vehicle that is not designed for use on paved roads, warns against operation on paved roads, and even warns of operation on dirt or gravel roads. It also stated that the X3 lacked “safety equipment required for vehicles designed for use principally on public roads such as rear safety bumper, horn, mirrors.” Progressive did not file a declaratory action to determine coverage.

(Progressive also denied Weinreis’s claim under a motorcycle policy that he purchased 3 days after the accident. Fettkether concedes that it did not apply because it was purchased after the accident. However, the parties also argue that purchase of the motorcycle policy implies some relevant mental state. According to Progressive, it indicated that he knew the X3 was not covered by the auto policy. Fettkether asserts that the purchase was pursuant to the requirement in the auto policy that Weinreis notify Progressive within 30 days of a newly acquired vehicle for it to constitute a covered auto. Neither provides evidence of these assertions so the Court finds both arguments speculative and irrelevant.)

Weinreis and Fettkether agreed that Weinreis would confess judgment for $1.6 million and assign his policy rights to Fettkether and Fettkether agreed not to execute judgment against Weinreis’s assets. Judge Moses found the settlement reasonable following a hearing which Progressive did not attend.

Fettkether sued Progressive in this Court 3/1/23. He seeks a declaration that it had a duty to defend Weinreis and breached its duty by failing to defend against Fettkether’s negligence action on Weinreis’s behalf. He seeks $1.6 million in contract damages, interest on the judgment, and attorney fees & costs. The parties request summary judgment.

Progressive argues that the X3 does not meet the definition of Auto and thus a Covered Auto for which the policy would provide injury coverage because it is an “off-road vehicle” and not designed for operation principally on public roads. It analogizes to Rodgers (WD Wash. 2019) which held that an ATV was not a Covered Auto.

Fettkether responds that Progressive cannot meet the “high bar” of the unequivocal demonstration standard for duty to defend because it cannot be said that the X3 could never have been an “Auto” as defined in the policy. Rather, it is at minimum ambiguous and at best unequivocal that a UTV like the X3 could be designed to operate on public roads. He cites Montana caselaw about the wide range of “public roads” which generally speak to whether the road is publicly or privately owned/accessible. He further argues that even if the Court accepts Progressive’s definition of a public road as only paved streets, Montana law permits UTVs to be driven on public highways and thus they can primarily be used for city driving.

On supplemental briefing Progressive attached the owner’s manual and quoted parts that stated that the X3 was a “high-performance off-road” vehicle that a user should “never operate on any public street.” Fettkether declined to address the X3’s specific features because “Progressive cannot now introduce — nor can the Court consider — any evidence that may negate coverage acquired after its denial of a defense.” Instead, Fettkether argued, quoting Tidyman’s (Mont. 2014), that the Court should focus on whether Progressive unequivocally demonstrated that there was no “potential for coverage,” not whether coverage in fact existed.”

The linchpin issue is whether Progressive unequivocally demonstrated that no coverage could exist because the X3 was not “designed for operation principally upon public roads.” Importantly, the policy does not define “public roads” or specify what design features would make a vehicle considered designed for operation principally on public roads.

Next, looking to the Complaint, Fettkether claims that his injuries stemmed from the operation of a Covered Auto. Thus if proven, his claims would fall under the policy. He does not comment on the X3’s design or suitability for operation principally on public roads; the Complaint only details the accident, his injury, his request that Progressive tender the $25,000 limit, and the litigation. The Complaint is insufficient on its face to conclude that a duty to defend existed. See Geraldine (Mont. 2008) (“We have repeatedly held that it is the acts giving rise to the complaint which form the basis for coverage, not the complaint’s legal theories or conclusory language.”)

The Court last looks to the facts considered by Progressive in refusing to defend, which are outlined in its denial letter. The letter states that it reviewed the owner’s manual and the requirements of the vehicle to operate on public roads. It summarized that the manual describes the X3 “as an ‘Off-Road’ vehicle which is not designed for use on paved roads. The owner’s manual also warns against operation on paved roads and even warns of operation on dirt or gravel roads.” It notes that the X3 “lacks the safety equipment required for vehicles designed for use principally on public roads such as a rear safety bumper, horn, mirrors.”

Since Progressive considered the owner’s manual in its investigation, the Court also will look to the manual. It explains that the X3 is a “high-performance off-road vehicle,” as Progressive’s denial letter stated. It also cautions, “Never operate this vehicle on any public street, road or highway, even dirt or gravel ones. Riding your vehicle on roads or highways could result in a collision with another vehicle. This vehicle is not designed for operation on roads. In many jurisdictions it is not legal to operate this vehicle on public roads.”

Based on the Court’s reading of the policy, complaint, denial letter, and owner’s manual, Progressive failed to make an unequivocal demonstration that the X3 was not designed for operation principally on public roads and could never be a Covered Auto. Its denial letter repeatedly references unsuitability for operation on paved, dirt, or gravel roads but does not state that such unsuitability also means that it is unsuitable for operation on a public road. Nor is “public road” defined as a paved, dirt, or gravel road in the policy. (Fettkether’s suggestion that “public road” could be referring to a public road versus a private road is not a reasonable interpretation. Whether a road is accessible to the public has no bearing on the type of vehicle that can operate on it, only the type of persons that can go down it.) The ambiguity of “public road” in the policy, the inconsistencies between the language evoked in the policy and the denial letter, and the obligation that the Court narrowly construe any exceptions to coverage preclude concluding that Progressive met the unequivocal demonstration standard.

The owner’s manual bolsters the Court’s conclusion. Progressive could have used the exact language regarding public roads from the manual in its denial letter so that its word choice was consistent with the policy and manual. Instead, it toggled between paved, dirt, and gravel roads. Parsing out whether a paved, dirt, or gravel road equates to a public road when such ambiguity exists in the Policy is too “nuanced” in a breach of duty to defend case and “makes it impossible to conclude that there was ‘an unequivocal demonstration’” that Fettkether’s claims fell outside the policy. In contrast, it is unequivocal that the motorcycle policy does not provide coverage because the accident occurred before the beginning of the coverage period.

(The Court did not seek the owner’s manual so it could analyze whether there was coverage, as it would in a declaratory action and as Fettkether seems to imply. It sought the manual so it could see first-hand what facts Progressive stated it had considered, how those facts translated into a denial letter, and how the language compared to the policy.)

While the denial letter states that the X3 lacks safety features that a vehicle designed for use principally on public roads must have, safety features are only 1 component of a design and, alone, cannot unequivocally demonstrate that the X3 was not a Covered Auto, particularly in light of the ambiguous statements regarding suitability of the X3 for certain types of roads.

Progressive’s reliance on Rodgers is misplaced because it concerns a declaratory judgment claim under the plaintiff’s UIM endorsement, not a breach of duty claim.

This case, like many presented to Montana state and federal courts, highlights the prudence that an insurer must undertake to not only uphold its duties under the policies it underwrites but also avoid liabilities in excess of the policy limits. Instead of filing a declaratory action to determine coverage and only facing a potential judgment for, if anything, the policy’s $25,000 limit, Progressive is now bound to pay the $1.6 million confession of judgment plus interest and attorney fees & costs. The Court hopes this serves as another reminder to Progressive and similarly situated parties that the prudent course is always to proceed under the reservation of rights clause and file a declaratory action.

Fettkether’s motion for summary judgment is granted.

Fettkether v. Progressive Northwestern Ins., 44 MFR 306, 1/10/24.

Colin Gerstner & Paul Adam (Gerstner Adam Law), Billings, and John Heenan (Heenan & Cook), Billings, for Fettkether; Randall Nelson (Nelson Law Firm), Billings, for Progressive.

ENVIRONMENT: CWA claim alleging pollution of West Fork of Gallatin River by use of sprinklers and snowmakers around ski runs and flushing of golf course irrigation system to discharge treated wastewater barred by consent decree in prior litigation… Morris.

Spanish Peaks Mountain Club and Lone Mountain Land Co. moved for summary judgment 10/20/23. Cottonwood Environmental Law Center opposes the motion. It filed a motion for a preliminary injunction 12/1/23. Defendants oppose this motion. A hearing was held 12/7/23.

Cottonwood asserts that Spanish Peaks discharges nitrogen pollution into the West Fork of the Gallatin River and its tributaries, contributing to algae blooms. It claims that Defendants use sprinklers and snowmakers on or around ski runs to discharge treated wastewater and that they flush the Spanish Peaks golf course irrigation system once per year using pipes on the golf course, spraying treated sewage into a stream of the West Fork without an NPDES permit in violation of the CWA.

Cottonwood asserts violation of the CWA, 33 USC 1311(1); violation of Montana public nuisance law, MCA 27-30-101(1); and violation of Montana criminal nuisance law, MCA 45-8-111. The Court previously granted Defendants’ motion to stay discovery and request for an expedited ruling.

Defendants raise 4 arguments in support of summary judgment: Cottonwood released its CWA claims when it settled Cottonwood Environmental Law Center et al v. Yellowstone Mountain Club (D.Mont.) (Cottonwood I); Cottonwood’s claims are barred by res judicata; Cottonwood’s CWA claim is barred because it involves only wholly past violations; Cottonwood lacks standing to assert its public nuisance claims. The Court need not reach all of these arguments because the Cottonwood I consent decree bars Cottonwood’s CWA claim.

(The consent decree, entered 11/16/22, required Spanish Peaks to install a new liner at Hole 10 of its golf course and limit irrigation with reclaimed wastewater to a maximum of 150 pounds of total nitrogen per acre per year and 33.6 million gallons per year for 5 years, pay $34,000 to the Bureau of Mines & Geology to study nutrient reduction and water conservation in the Big Sky area, and hire a consultant to develop a surface monitoring plan along the Middle Fork.)

The Cottonwood I consent order “effectuates a full and complete settlement and release of all the claims against Defendant in Plaintiffs’ amended Complaint and sixty-day notice letter.” The settlement also covered “all other claims known and unknown that could be asserted under the Clean Water Act based on the factual allegations made in the Amended Complaint and sixty-day notice letter (the “Claims”).” The parties agreed that “enforcement of this Order represents the Parties’ exclusive remedy for any violation of its terms and conditions.” The consent decree resolved the claims in the amended complaint in Cottonwood I. The Court looks next to the amended complaint.

The Cottonwood I amended complaint alleged that Spanish Peaks was “adding Nitrates + Nitrites as Nitrogen and Total Nitrogen into the West Fork of the Gallatin River.” It alleged that Spanish Peaks added these pollutants “by overirrigating its golf course with treated effluent, by spraying treated wastewater into drains on the golf course, by irrigating when the grass is frozen, and by failing to maintain its treated sewage pond and related equipment.” The amended complaint identified as point sources the “golf course and related equipment, including but not limited to sprinklers and drains, in addition to the wastewater holding pond and related equipment.”

The Court finally reviews the 60-day notice letter of alleged CWA violations provided by Cottonwood to Spanish Peaks. It broadly identified the CWA violations as emanating from “a stream entering the Middle Fork that appears to originate on the Spanish Peaks golf course.” Cottonwood informed that “the stream appears to begin at the Spanish Peaks Mountain Club.” It alleged that Spanish Peaks “is discharging pollutants to navigable waters without an NPDES permit in violation of the CWA.” It further identified the effluent holding ponds and infrastructure at Spanish Peaks as “contributing to the issue.”

Cottonwood now seeks to assert a CWA claim that could have been brought in Cottonwood I. This action and Cottonwood I both concern discharge of treated wastewater as “reclaimed water” or “treated sewage.” The Court must agree with Defendants that the treated wastewater here and the treated wastewater in Cottonwood I originate from the same source: The Hole 10 pond. The same treated wastewater, stored in the Hole 10 pond, traveled through the same pipe infrastructure on the Spanish Peaks Golf Course in Cottonwood I and in this action. It allegedly enters a tributary of the Gallatin River in violation of the CWA in both Cottonwood I and this action.

Cottonwood contends that its new CWA claim exceeds the scope of the Cottonwood I consent order. It argues that its current CWA claim concerns snowmakers and golf course pipe infrastructure as the point sources for the treated wastewater and that these point sources differ from the ones alleged in Cottonwood I. The Court disagrees.

The 2021 DEQ Nutrient Management Plan authorizes Spanish Peaks to irrigate using treated wastewater in Forest Areas, Par 3 Golf Course, and Hotel & Cabins. DEQ approved the NMP 7/20/21. It authored a separate letter 9/15/21 approving the irrigation plan for Spanish Peaks. Its approval included expansion of irrigation operations into “naturally forested areas adjacent to existing golf course irrigation sites.”

Cottonwood sent its 60-day notice letter to Spanish Peaks in Cottonwood I 11/5/21. Both the 2021 NMP and the 2021 DEQ approval predate Cottonwood I‘s 60-day notice letter. DEQ approved the NMP 7/20/21 and the irrigation plan for Spanish Peaks 9/15/21. Cottonwood knew or could have known of these activities at the time it entered the Consent Decree 11/5/21. Its CWA claim in this action represents a claim that similarly could have been known during Cottonwood I based on the 2021 NMP and 2021 DEQ approval.

Cottonwood now attempts to challenge Spanish Peaks’ irrigation practices and use of treated wastewater in a piecemeal manner that proves inconsistent with the express terms of the Cottonwood I consent order. The consent order served as a negotiated settlement that released “all the claims against Defendant in Plaintiffs’ Amended Complaint and sixty-day notice letter and all other claims known and unknown that could be asserted under the CWA based on the factual allegations made in the Amended Complaint and sixty-day notice letter.”

Both Cottonwood and Spanish Peaks are sophisticated parties, represented by counsel, who engaged in good faith negotiations that culminated in the consent order. The consent order appears to contain no reservation of right for Cottonwood to bring suit for an alleged CWA violation arising from the same facts. It instead provides Cottonwood the opportunity to enforce the consent order if Cottonwood first files a complaint with DEQ and DEQ fails to act on that complaint for 6 months.

The Court declines to extend the consent order to cover all potential claims raised by any party arising from alleged pollution of the West Fork by Spanish Peaks due to its use of treated wastewater for irrigation. The Court’s determination that the consent order bars Cottonwood from bringing its CWA claim in this action rests on the conclusion that it knew or could have known about alleged discharge of treated wastewater from snowmakers and sprinklers by Spanish Peaks and the alleged flushing of the golf course pipe infrastructure before and during the Cottonwood I action.

The consent order would not bar litigation by other groups or persons who were not parties to the consent decree. Other groups or persons remain free to allege CWA violations against Spanish Peaks. In fact, Cottonwood also remains free to allege CWA violations distinguishable from the facts alleged in Cottonwood I even if they related to the alleged pollution of the same West Fork and its tributaries. Cottonwood elected to forego only those allegations related to the facts in Cottonwood I when it entered the consent order.

The Court need not address Defendants’ res judicata claims in light of the broad language of the consent order that bars Cottonwood’s CWA complaint. Cottonwood conceded its public nuisance claims in response to Defendant’s summary judgment motion.

Defendant’s summary judgment motion is granted. Cottonwood’s motion for preliminary injunction is denied as moot.

Cottonwood Environmental Law Center v. Spanish Peaks Mountain Club and Lone Mountain Land Co., 44 MFR 305, 12/20/23.

John Meyer (Cottonwood Environmental Law Center), Bozeman, and Aaron Rains, Butte, for Plaintiff; Ian McIntosh (Crowley Fleck), Bozeman, and Jon Rauchway, Andrea Bronson, and Michael Golz (Davis Graham), Denver, for Defendants

CLASS ACTION: Preliminary injunction granted prohibiting Boyne from terminating Rental Management Agreements with named Plaintiff condo owners as alleged tactic to intimidate others into opting out… Morris.

Boyne USA owns & operates Big Sky Resort and 3 condo-hotels at the base of Big Sky known as the Summit, Shoshone, and Village Center. Plaintiffs own units in the Condos. Unit owners may not lease their units except through Boyne. Plaintiffs hold title to the Condos subject to certain Declarations. Boyne drafted the Declarations and does not allow amendments without its consent. Boyne prepared the Rental Management Agreements that unit owners must sign if they are not using their unit for personal use. They allege that the RMAs violate state and federal law.

Plaintiffs moved 2/3/23 to maintain the status quo, seeking to enjoin Boyne from terminating RMAs during the class certification process. The Court’s 2/23/23 Order prohibited Boyne from terminating the RMAs for 60 days. It orally granted a 60-day extension 4/12/23. It failed to put this order in writing or include it in the minute entry. Boyne appealed the injunction. The 9th Circuit remanded for clarification as to whether the order prohibiting termination of the RMAs remained in effect. The Court clarified that it had granted the injunction solely to protect the integrity of the class certification process and that its certification of the class in 6/23 “extinguished these concerns” and thus the injunction had expired. Plaintiffs seek another injunction to prevent Boyne from terminating the RMAs on 12/16/23.

Plaintiffs argue that Rule 23(d) and the Court’s inherent power to manage its cases provide authority to issue the injunction. They contend that Boyne’s tactics constitute a form of retaliation meant to influence class members to opt out of the class action. Boyne responds that it has sought to terminate the RMAs of only the named Plaintiffs, not all class members. It contends that its actions prove non-coercive as to the whole class because its actions relate only to the named Plaintiffs and no evidence exists that any other class members would learn of the termination of the named Plaintiffs’ RMAs.

Rule 23(d)

Any orders issued under Rule 23(d) must “be based on a clear record and specific findings that reflect a weighing of the need for a limitation and the potential interference with the rights of the parties.” Gulf Oil (US 1981). Courts look to the potentially coercive nature of the conduct toward class members and evaluate whether the conduct “is so misleading or coercive that it threatens the fair and efficient administration of a class action lawsuit.” O’Connor v. Uber Techs (ND Cal. 2013) (O’Connor I). For example, the defendant in Lake v. Unilever (ND Ill. 2013) sent releases and a settlement offer to consumers of the product for which they were sued. The court noted that “none of the class members are dependent on Unilever for their financial livelihood and thus it cannot be said that the business relationship between Unilever and the potential class members is inherently coercive.” The court found no evidence of coercion and denied the request to limit Unilever’s communications with potential class members or vacate the releases obtained by Unilever.

The court found evidence of coercive conduct against class members in O’Connor I. Uber restructured its licensing agreement to include an arbitration provision after it had been sued by drivers in a class action. Continued access to the Uber app and thus the ability to continue driving for Uber depended on acceptance of the new terms of service. The court noted that “the arbitration provision at issue includes a class action waiver, purporting to contractually bar Uber drivers from participating and benefitting from any class actions.” The court recognized the potential coercive effect of Uber’s tactics: “the promulgation of the Licensing Agreement and its arbitration provision runs a substantial risk of interfering with the rights of Uber drivers under Rule 23.” It refused to enforce the arbitration provision unless Uber gave drivers “clear notice of the arbitration provision, the effect of assenting to arbitration on their participation in the lawsuit, and reasonable means of opting out of the arbitration provision.”

Wang v. Chinese Daily News (9th Cir. 2010) upheld a district court’s decision to invalidate opt outs from potential class members. A class of employees had sued for violations of the FLSA. The employer terminated several named class members and the lead representative during the opt-out period. The 9th Circuit agreed with the district court’s determination that “the opt out period was rife with instances of coercive conduct, including threats to employees’ jobs, termination of an employee supporting the litigation, the posting of signs urging individuals not to tear the company apart, and the abnormally high rate of opt outs.”

IHOP Franchise Litigation (WD Mo. 1972) similarly recognized the coercive pressure that termination of a franchise agreement could have on a class action. The franchise holders instituted a class action against their franchisor. The franchisor threatened to terminate franchise agreements with some of the plaintiffs after institution of the suit. The court recognized that this conduct was “designed to use economic power, which the franchisor possesses, to drive these plaintiffs out of business as a lesson to other members of the class not to participate in the class action.” The court enjoined the franchisor from terminating franchise agreements held by the plaintiffs for any reason besides non-payment.

Boyne’s conduct raises similar concerns to those in IHOP and Wang. It has provided notice that it intends to terminate the RMAs with the named Plaintiffs. Importantly, the declarations for the unit owners’ condos prohibit leasing their units through anyone other than Boyne. Thus by terminating the named Plaintiffs’ RMAs, Boyne effectively would prevent them from being able to rent their units and earn rental income.

Boyne contends that this is non-coercive. It argues that it has sought to terminate only the named Plaintiffs’ RMAs and that none of the other class members would know of the terminated agreements. Plaintiffs noted at the hearing that the Big Sky community is small and it proves unlikely that other class members or potential class members would not learn of the terminations. Boyne further argues that the named Plaintiffs “are hardly destitute or financially reliant on rental income from their vacation properties.” It noted that many of them purchased their units for nearly $1 million cash and retain them as 2nd or 3rd homes. Plaintiffs counter that they rely on the rental income to offset the expensive HOA dues of some $30,000 per unit in addition to special assessments, which totaled $180,000 for Erharts’ 2 units.

Boyne ignores that the prominent inquiry under Rule 23(d) involves coerciveness. Threatened conduct may have a greater effect when a plaintiff or class member proves wholly financially dependent on the defendant as in IHOP and Wang. Conduct may still prove coercive and abusive where the plaintiff has other income. A heightened concern for coercive conduct exists where, as here, the class members and class opponents remain in an ongoing business relationship.

Plaintiffs rely on rental income to offset hefty HOA fees. They will be unable to earn rental income if Boyne terminates their RMAs. An example proves illustrative of the coercive nature of Boyne’s tactics. It assessed Plaintiff Anderson $24,067 in rental expenses in 2021, of which $21,413 represented condo association fees. Anderson offset this by renting out his condo and earning $21,480. Being forced to pay $20,000-$30,000/yr represents a substantial economic threat. Boyne’s conduct incentivizes Plaintiffs to abandon their suit to avoid termination of their RMAs.

Boyne’s letter indicating intent to terminate the RMAs directly ties the decision to terminate to Plaintiffs’ suit. Its other conduct throughout litigation, including threatening to terminate the RMAs in the class certification stage and implementing a ban on skiing or staying at Big Sky for all attorneys and staff working for Plaintiffs, supports Plaintiffs’ argument that its conduct serves to intimidate others from participating in the litigation.

Boyne argues that it seeks to terminate the RMAs to limit any damages for which it may be held liable. It contends that Plaintiffs have claimed that the RMAs prove illegal and that the rental management scheme exposes Boyne to liability. It argues that the damages for which it could be held liable will continue to accrue if forced to continue the RMAs with Plaintiffs. Plaintiffs indicated at oral argument that the named Plaintiffs would forego damages from this point forward if the RMAs stay in place.

The need for a limitation on Boyne’s conduct proves clear. Termination of the RMAs threatens to take away the income on which the named Plaintiffs rely to offset the hefty condo association fees. Termination of the RMAs in light of the class members’ ongoing business relation with Boyne presents substantial concern for an improperly coercive impact on class members’ choice to participate in the litigation. The potential interference with Boyne’s rights proves minimal if damages from continued operation of the RMAs are disallowed from this point forward. An order prohibiting Boyne from terminating the named Plaintiffs’ RMAs proves necessary to “protect the integrity of the class and the administration of justice.” O’Connor II (ND Cal. 2014); Gulf Oil. Disallowing damages that arise after this Order adequately balances and protects Boyne’s interests in limiting its damages.

The Court’s inherent authority

Strong precedent exists “‘establishing the inherent power of federal courts to regulate the activities of abusive litigants by imposing carefully tailored restrictions under the appropriate circumstances.’” De Long (9th Cir. 1990); Tripati (10th Cir. 1989). Boyne argues that Rule 65 controls issuance of injunctions. The Court recognizes the 9th Circuit’s guidance that “it is preferable that courts utilize the range of federal rules and statutes dealing with misconduct and abuse of the judicial system.” Hanshaw (9th Cir. 2001). However, it has also recognized that “courts may rely upon their inherent powers even where such statutes and rules are in place.” Id. The Court finds that a preliminary injunction under Rule 65 proves warranted, but also determines that it could issue an injunction enjoining Boyne from terminating the named Plaintiffs’ RMAs pursuant to its inherent powers.

Boyne has threatened to terminate the named Plaintiffs’ RMAs specifically because of their suit against it. It threatened to do so before class certification and has renewed the threat following certification but before the opt-out process. The Court has recognized the improper risk of coercion that such threat poses for class members deciding whether to participate in the class action. The Court possesses no doubt that its inherent authority empowers it to issue an injunction prohibiting termination of the RMAs where its conduct “is calculated to frustrate litigation.” Bergen Drug (3rd Cir. 1962). The limitation on the named Plaintiffs’ ability to claim damages going forward reflects a balancing of the parties’ interests consistent with the restraint and discretion required when exercising inherent powers.

Rule 65 and Winter

A plaintiff seeking a preliminary injunction must establish (1) a likelihood to succeed on the merits, (2) a likelihood of suffering irreparable harm absent preliminary relief, (3) a balance of equities favoring the movant, and (4) that an injunction supports public interest. Winter (US 2008). A party seeking a mandatory injunction must meet a heightened standard — it must “establish that the law and facts clearly favor its position, not simply that it is likely to succeed.” Garcia (9th Cir. 2015).

Boyne argues that the heightened standard for mandatory injunctive relief applies to Plaintiffs’ request. It argues that the relief requested constitutes a mandatory injunction because it changes the status quo. It contends that it remained free to cancel RMAs with any condo owners before Plaintiffs filed this action. It characterizes the relief that they seek as requiring “Boyne be forced to continue providing Plaintiffs with rental management services against its will.” The Court disagrees.

The status quo constitutes “the last, uncontested status which preceded the pending controversy.” Marlyn Nutraceuticals (9th Cir. 2009). Plaintiffs participated in the rental management program well before they sued Boyne. An injunction to prohibit Boyne from terminating the RMAs would not result in any affirmative change but would allow Boyne and the named Plaintiffs to continue renting Plaintiffs’ units in accordance with the RMAs as since before filing of the suit. The injunction would maintain the status quo; thus the ordinary Winter standard proves appropriate.

a. Likely to suffer irreparable harm

Boyne asserts that Plaintiffs have failed to demonstrate that they are likely to suffer irreparable harm — that they have primarily shown that they will suffer monetary harm. Plaintiffs allege that Boyne’s planned termination of the RMAs “threatens to influence the litigation.” The Court agrees with Plaintiffs. A great likelihood exists that potential class members will weigh the cost of potentially losing their RMAs when choosing whether to participate in the litigation. This implicit economic pressure is not only improper but also threatens fairness of the litigation and potential class members’ right to participate.

b. Balance of the equities

Boyne argues that Plaintiffs are very wealthy and do not rely on their rental income for their livelihood and thus denying their request for injunctive relief would minimally impact their income while exposing Boyne to increased liability and damages. It ignores Plaintiffs’ willingness to forego damages that may arise from this point from continuation of the RMAs.

Boyne indicated at the hearing that it will continue renting out other owners’ units pursuant to RMAs identical to those entered with Plaintiffs. It indicated no hardship in renting out the named Plaintiffs’ units besides the potential increase in damages that Plaintiffs could claim.

Boyne faces no prejudice by continuing the named Plaintiffs’ RMAs if the Court prohibits them from recovering damages that arise after this order from continuation of the RMAs. In fact, Boyne benefits from an injunction. It can continue renting out Plaintiffs’ units and earning income from those rentals without facing any related increase in the damages claimed. Plaintiffs would suffer loss of rental income on which they rely to offset the hefty condo association fees and also a great risk that class members would feel pressured not to join the class action to keep Boyne from terminating their RMAs. The balance of the equities tips sharply in favor of Plaintiffs.

c. Public interest

Boyne argues that denying injunctive relief would serve the public interest because the public has an interest in the freedom to contract and public interest disfavors specific performance of contracts. However, the right of potential class members to make a free and informed choice about participation also constitutes a public interest. Enjoining Boyne’s proposed conduct would prevent undue influence on potential class members in deciding whether to participate and protect the integrity & fairness of the class action.

d. Likely to succeed on the merits

Plaintiffs have raised claims regarding, inter alia, breach of fiduciary duty, constructive fraud, breach of contract, and unfair trade practices, and seek a declaration that the condo Declarations’ requirement that unit owners use Boyne as their rental manager proves illegal and unenforceable. They have raised serious questions as to the merits of several of these claims.

For example, with Plaintiffs’ unfair trade practices claim, they allege that “Boyne illegally and unfairly ‘tied’ its rental management services to ownership of units in the Condo-Hotels and other condominiums through the declarations.” A tying arrangement exists where a seller exploits its control over the tying product to force the buyer into the purchase of a tied product “that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms.” Hyde (US 2006). Boyne correctly notes that the Declarations do not require condo owners to rent their properties such that they can avoid RMAs by not renting. It ignores that the Declarations force unit owners who might have sought to purchase rental management services elsewhere on different terms to enter an RMA with Boyne. The Declarations “reduce competition in the market for the tied product,” which is the rental management services. Rick-Mik (9th cir. 2008).

Plaintiffs have also raised serious questions as to the merits of their breach of fiduciary duty claim. A fiduciary relationship likely exists due to sale of the condo likely constituting a security as defined by the SEC:

Condominium units may be offered with a contract or agreement that places restrictions, such as required use of an exclusive rental agent, on the purchaser’s occupancy or rental of the property purchased. Such restrictions suggest that the purchaser is in fact investing in a business enterprise, the return from which will be substantially dependent on the success of the managerial efforts of other persons. In such cases, registration of the resulting investment contract would be required.

Regardless, Boyne agreed to act as Plaintiffs’ agent for the purpose of renting, managing, and operating the units. An agency constitutes a fiduciary relationship that imposes certain duties on the agent, including to “act with the utmost good faith and loyalty for the furtherance and advancement of the interests of his principal” and to “not, without the knowledge of his principal, engage in transactions which tend to bring his personal interest into conflict with his obligations to his principal or place himself in a position where his interests may become antagonistic to those of his principal.” Sant (Mont. 1973).

Plaintiffs have alleged that Boyne inflated fees associated with rental stays including resort and breakfast fees to reduce the room rate available to unit owners. They contend that Boyne inflated these fees to increase their profit since it must split only the room rate with unit owners and does not split these other fees. They have raised serious questions as to whether it placed its interests in conflict with them in this profit-sharing scheme. Plaintiffs have also raised serious questions as to whether it complied with the duties for trust accounting placed on property managers by the Administrative Rules of Montana.

Serious questions have been raised as to the merits, Plaintiffs are likely to suffer irreparable harm, injunctive relief serves the public interest, and the balance of equities tips sharply in favor of Plaintiffs. Plaintiffs’ motion for injunctive relief is granted. Boyne is prohibited from terminating its RMAs with the named Plaintiffs. Plaintiffs are prohibited from recovering any damages that may arise from continued operation of the RMAs. The Court waives the requirement that Plaintiffs provide a security bond as the prohibition against damages from this point forward from operation of the RMAs ensures that Boyne will not suffer any harm from the injunction.

 

 

– – – 

 

In a separate proceeding, the 9th Circuit on 11/21/23 denied Boyne’s Rule 23(f) petition for permission to immediately appeal Judge Morris’s 6/28/23 class certification order, citing Chamberlan (9th Cir. 2005) (describing factors the Court considers in analyzing a 23(f) petition).

Anderson, Erhart, and Claggett v. Boyne USA, Boyne Properties, and Summit Hotel, 44 MFR 304, 12/13/23.

Benjamin Alke & John Crist (Crist, Krogh, Alke & Nord), Bozeman, and Devlan Geddes, Jeffrey Tierney, and Henry Tesar (Goetz, Geddes & Gardner), Bozeman, for Plaintiffs; Ian McIntosh, Kelsey Bunkers, Mac Morris, and Joe Norena (Crowley Fleck), Bozeman, for Boyne.