ERISA: Claims Administrator acted legally but perhaps not morally in denying preapproval of stem cell transplant for systemic sclerosis pursuant to Plan’s experimental/investigational exclusion despite claim by doctors that it is medically necessary to prevent death… Molloy.

Lana Robertson seeks a declaration that a medical procedure is covered by her health benefits plan. At issue is the tension posed by the human person who is facing certain death absent the treatment, and an ERISA plan and administrator that resort to legalisms supported in some sense by the idea of the rule of law to deny her a chance at life. Sadly, in this and so many other cases decided pursuant to a law intended to protect employees, there seems to be little concern about the moral consequences of denial of benefits. The decision by the plan administrator is akin to the “death panels” ostracized for political purposes. Yet the legalistic arguments and the law seem to dictate an untenable moral determination. Judge Noonan of this Circuit noted aptly in Persons and Masks of the Law, “Abandonment of the rules produces monsters; so does the neglect of persons.” To paraphrase him, at the intersection of the conflict between rules and persons, the process of the rule of law is to be understood. “A chief difficulty to understanding, however, is the presence of masks, formed by rules and concealing the person.” The legal reasoning justifying resolution of the pending motions is monstrous in its concealing the likely life-ending consequences of applying rules and ignoring the person. However, for the reasons stated below, which sound in the legal rules of interpretation and not in equity, Robertson’s motion is denied and Defendants’ motions are granted.

Stallion Oilfield Holdings is Plan Sponsor and Plan Administrator. BCBS of Texas is Claims Administrator and Claims Fiduciary. It is a division of Health Care Service Corp. Robertson is enrolled in the Select Plan Managed Care Program. She was diagnosed in 7/11 with diffuse systemic sclerosis. Without treatment it can attack internal organs and is fatal once it infiltrates the lungs or heart. She initially received drug-oriented treatment under the Plan, which was ineffective. Richard Burt of Feinberg School of Medicine recommended a hemapoietic stem cell transplant. BCBS denied preapproval, concluding that it is “experimental, investigational, and unproven,” referencing HCS’s Medical Policy. An independent review upheld the denial, again referencing HCS’s Medical Policy. Robertson submitted her final appeal in 2/14 with more than 300 pages of medical records and articles and physician letters. A different review organization again affirmed the denial. Robertson sued Stallion and BCBS seeking a declaration that the Plan covers the procedure.

Robertson claims that a violation of ERISA procedural requirements requires a de novo review and that BCBS “did just that” by failing to engage in a medical necessity analysis and by withholding the information it relied on in making its determination. Only “when an administrator engages in wholesale and flagrant violations of the procedural requirements of ERISA, and thus acts in utter disregard of the underlying purpose of the plan,” will the denial be reviewed de novo. Abatie (9th Cir. 2006, en banc). There is no proof that BCBS engaged in “wholesale and flagrant violations.” Robertson also argues that an inherent conflict of interest that affects a determination alters the standard of review and that BCBS had such a conflict because of its pecuniary interest and its interest in establishing precedent for future denials for the procedure. BCBS does not fund the plan, and Robertson has produced no evidence demonstrating that it, as a division of HCS, had a vested pecuniary interest in denying coverage or that it sought to establish precedent for future denials. Not only does the abuse of discretion standard apply, there is no conflict of interest to be weighed in determining whether BCBS abused its discretion.

Robertson insists that the clinical trial exclusion does not apply to the procedure. The provision that “treatment provided as part of a clinical trial or a research study is “Experimental/Investigational” is unambiguous. There is no question that Robertson sought to enroll in a phase 3 clinical trial, which is described as a “study” that will provide treatment to the participants in both the “control” and “experimental” arms of the program. BCBS arguably construed the exclusion in a legally reasonable way. Moreover, Burt acknowledged that the procedure is not “standard therapy” for severe systemic sclerosis. The literature Robertson submitted shows that it is still under investigation and is associated with treatment-related mortality, but is not “in general use in the medical community.” Robertson claims that the clinical trial is not testing whether the procedure is safe & effective, but whether a less intense regimen is safer and as effective as the standard regimen. Although this argument may have merit, she cites no authority or Plan provision supporting her restricted definition of “clinical trial,” while the clinical trial exclusion broadly excludes “treatment provided as a part of a clinical trial.” BCBS also relied on the HCS Medical Policy in denying coverage. Robertson claims that the HCS guidelines have not been peer-reviewed or incorporated into the Plan documents, and that it demonstrates that the procedure is more effective than drug therapy, which has been ineffective. The Policy provision states that the Plan documents govern, and a claim “stands or falls by the terms of the plan.” Kennedy(US 2009). Where BCBS reasonably relied on the Plan’s clinical trial exclusion, its additional reliance on the Medical Policy is of no consequence regardless of whether it supports coverage. BCBS did not abuse its discretion in relying on the clinical trial exclusion to deny benefits.

Robertson insists that BCBS abused its discretion by not making a medical necessity determination, which would “trump” the experimental/investigational exclusion. However, the Plan unambiguously states that benefits are not available for experimental/investigative services. To interpret it to cover all medically necessary treatments regardless of any exclusions or limitations would render those exclusions meaningless. Johnson(4th Cir. 2013).

Robertson also maintains that the exclusion is unenforceable under the reasonable expectations doctrine. While she may reasonably expect coverage for any treatment that is medically necessary, the experimental/investigational exclusion is plain, conspicuous, and enforceable. Winters (9th Cir. 1995).

Robertson included in her final appeal 4 instances where BCBS entities approved the same procedure because it was medically necessary despite a prior determination that it was experimental/investigational. One of those involves BCBS of Illinois, which is also a division of HCS. Although it is disconcerting that BCBS entities may be making inconsistent determinations, the Plan language under which those determinations were made are not part of the record and cannot be used in analyzing this case.

Robertson’s medical condition cannot be conflated with her legal condition so that the Court is “left with a definite and firm conviction that a mistake has been committed.” Salomaa (9th Cir. 2011). BCBS acted legally in denying preapproval of the procedure because her enrollment in the clinical trial is excluded as experimental/investigational under terms of the Plan.

Robertson v. BCBS of Texas and Stallion Oilfield Holdings, 42 MFR 443, 4/15/15.

Donald Harris (Harris & Associates), Billings, and Tucker Gannett (Harris & Warren), Billings, for Robertson; Stanley Kaleczyc, Daniel Auerbach, and Kimberly Beatty (Browning, Kaleczyc, Berry & Hoven), Helena, and Rebecca Hanson (Foley & Lardner), Chicago, for BCBS; Shane Coleman & Michael Manning (Holland & Hart), Billings, and Michael Beaver (Holland & Hart), Greenwood Village, Colo., for Stallion.

INSURANCE: “Claim” per claims-made-and-reported Real Estate E&O Policy must be made within policy period, not extended reporting period… claim was made when Realtor received notice of suit following expiration of policy period, not 7 months earlier when suit was filed, was untimely, insurer not required to defend or indemnify $2,191,828.90 consent judgment… Molloy.

Continental Casualty issued a Real Estate Professional E&O Policy to Re/Max Realty Consultants for 9/6/07-9/6/08. It states that “a claim must be first made during the policy period.” It defines “claim” as

an oral or written demand received by the Insured for money or services, including a demand alleging personal injury, arising out of an act or omission in the rendering of professional real estate services. The service of suit or the institution of an arbitration proceeding against the Insured will be considered a demand.

As to notice of claims to the insurer:

The Insured, as a condition precedent to our obligations, must promptly give written notice to us during the policy period or any renewal policy period:

a. of any claim made against the Insured during the policy period;

b. of any notice, advice or threat, whether written or verbal, that any person or organization intends to hold the Insured responsible for any alleged breach of duty or other act or omission.

This condition will not be a barrier to coverage for those Insureds who do not have personal knowledge of a claim or potential claim. However, all Insureds must promptly comply with this condition upon obtaining such knowledge.

Re/Max was advised 6/27/08 that the policy was set to expire 9/6. It received a renewal invoice 8/28 informing it that coverage would terminate 9/6 if not renewed. Re/Max did not renew. The non-renewal automatically triggered the extended reporting period, defined as

the period of time after the end of the policy period for reporting claims by reason of an act or omission, which occurred prior to the end of the policy period and is otherwise covered by this Policy.

There is also an “automatic extended reporting period” of 60 days if the policy is canceled or non-renewed. With this automatic extension, Re/Max’s extended reporting period terminated 11/5/08.

On 4/18/08, Larry & Patricia Schleusner filed a State Court action against Re/Max and an agent alleging damage as a result of conduct while acting as their agents. Their counsel mailed notice of the action and a copy of the complaint to Re/Max 11/4/08, and Re/Max received the notice 11/5. According to Schleusners, former Re/Max owner Judith Wahlberg reviewed the letter and complaint and sent the claim to Continental the day she received it. Continental asserts that it received notice 11/18, after termination of the extended reporting period. Schleusners contend that this date is both disputed and immaterial. Continental declined coverage 11/21. Whether Schleusners chose to sue Re/Max with or without insurance was a tactical litigation choice.

Schleusners settled with the agent in 10/13 and with Re/Max in 4/14. Both confessed to $2,191,828.90 entry of judgment and assigned their claims for coverage from any insurers to Schleusners. Judgment was entered, and on 7/31/14 Schleusners filed suit in State Court for a declaratory judgment, which Continental removed to this Court. Continental requests summary judgment that it is not obligated to provide coverage because notice was not timely. Schleusners request a declaration that Continental breached its duty to defend.

The policy is on its face a claims-made-and-reported policy, conditioning indemnity and defense on claims made during the policy period and reported prior to expiration of the extended reporting period. Whether the claim was timely turns on whether the suit against Re/Max 4/18/08 constituted making a claim or whether a claim was initially made 11/5/08 when Re/Max was made aware of the claim. Continental asserts that a “claim” requires that a demand for money or services be received by the insured and it must be received when the policy is in effect. Schleusners argue that the policy “must be interpreted as allowing a claim to be first made at some time prior to when it is received by the insured.” Continental is correct. Pursuant to the plain language of the policy, a claim was made 11/5/08 when Re/Max received notice of the underlying suit, not 4/18 when the suit was initially filed. It then is necessary to decide whether a claim made during an extended reporting period is timely. The clear policy language indicates that to trigger coverage, a claim must be made on the insured within the policy period itself. Consequently, the claim, made beyond the policy term, was not timely.

Schleusners look to the “personal knowledge” provision to argue that the notice requirements are ambiguous. To the extent that this makes the policy ambiguous, it at most makes it as applied a claims-made policy as opposed to a claims-made-and-reported policy. It can be reasonably interpreted to allow an insured to report a claim outside the policy period or the extended reporting period as long as it “promptly” does so once it has personal knowledge. This interpretation, while construing the policy in the light most favorable to the insured, does not make a claim filed after termination of the policy period timely. If it did, instead of turning the policy into a mere claims-made policy, it would effectively turn it into an occurrence policy. The Court cannot rewrite the policy. Because the claim was not timely made, there is no coverage as a matter of law, even if the report to the carrier inures to the insured’s benefit as to notice.

Because the condition precedent of a timely claim was not met, Continental had no duty to defend or indemnify, and Schleusners’ bad faith claim also fails as a matter of law. Summary judgment for Continental.

Schleusner v. Continental Casualty, 42 MFR 433, 4/10/15.

David Cotner & Trent Baker (Datsopoulos, MacDonald & Lind), Missoula, for Schleusners; Maxon Davis & Jeffry Foster (Davis, Hatley, Haffeman & Tighe), Great Falls, and Steven Crane (Berkes, Crane, Robinson & Seal), LA, for Continental.

ATTORNEY FEES: $342,881 fees & costs awarded out of ex-girlfriend’s 16% share of deceased’s $2,808,425 stock account for defense by 3 other beneficiaries of frivolous claim to entire account, affirming Cebull’s award following remand from 9th Circuit to allow objections as to amounts… Watters.

James LeFeber executed a Scottrade Transfer on Death Beneficiary Plan a month before his death in 2010 at age 71. His former girlfriend Kristine Davenport claimed his entire account based on a purported 2007 oral contract. The others named in the TOD — Shane LeFeber, Patricia Faller, Christopher Gibbons, Kimberly Chabot — did not contest the TOD. Davenport sued in State Court alleging a conspiracy of the others to interfere with the purported oral contract, and that they had murdered LeFeber by giving an overdose of pain medications he took for terminal cancer and then illegally cremated him. When she refused to release Scottrade if it distributed the proceeds pursuant to the TOD, it filed an interpleader in Federal Court and placed $2,808,425.21 in the Court registry and was dismissed. Judge Cebull concluded 7/31/12 that all of Davenport’s claims were frivolous and that her share of the Scottrade account in the registry must be reduced by the other parties’ fees & costs because her claims caused the “unnecessary lawsuit.” Following a review of invoices submitted by Fallers’ counsel he determined that $181,031.12 in attorney and paralegal fees & costs was reasonable for Patricia and $13,706.78 (including $33.18 costs) for her husband Arnold (who is not a beneficiary of LeFeber’s account but was named an alleged conspirator), and $148,143.21 for Shane LeFeber. He also awarded $6,142.53 fees & costs to Scottrade. Davenport appealed, asserting 39 claims of error and challenging Cebull’s award of fees & costs to Fallers and Shane.Scottrade (9th Cir. 2014 unpublished) stated:

Davenport’s serious claims — that the other beneficiaries used undue influence to negate an oral agreement for her to get all of LeFeber’s assets, and indeed killed the decedent to gain their objectives — required more than the assertions of an interested party to proceed, specially since it is undisputed that the alleged oral agreement was never recorded, witnessed or reduced to a signed writing. Given this factual context, Davenport had to produce real evidence of a dispute; instead, her evidence consists of speculative assertions in uncorroborated, self-serving affidavits.

It held that Cebull properly awarded fees to Scottrade pursuant to federal interpleader law, and that he properly recognized that he had authority to award fees to Fallers and Shane, but that Davenport should have explicitly been given the opportunity to object to the amounts. Her objections have now been lodged and briefed.

Davenport mostly argues why Patricia should not get fees at all. By now it should be very clear that the only issue is the amount to be awarded, so the Court will not consider any of her objections or arguments as to whether fees are appropriate. Nor will it consider any of her arguments “incorporated by reference” to her other filings. LR 7.1(d)(2); Sandgathe (9th Cir. 2002).

Davenport objects that the amount of fees requested by Patricia impermissibly includes “fees on fees.” However, Cebull awarded fees pursuant to his inherent authority under federal law after finding her conduct vexatious. Under federal law, fees are ordinarily awarded for hours expended in preparing the fee application.Rosenfeld (9th Cir. 1975). “It would be inconsistent to dilute an award of fees by refusing to compensate an attorney for the time spent to establish a reasonable fee.” Manhart (9th Cir. 1981). Montana similarly supports fees incurred in preparing a fee application when necessary “to make the injured party whole … where the action into which the prevailing party has been drawn is without merit or frivolous.” Motta (Mont. 2013). Davenport raised no other objection to these fees. The Court finds them reasonable.

Davenport argues that Patricia’s fees are “unreasonable and excessive,” noting that they were $35,000 more than Shane LeFeber’s fees. Cebull’s determination remains persuasive, that “although the Beal Law Firm bill is much larger than that charged to Shane LeFeber, Shane LeFeber was not alleged to have murdered James LeFeber with a morphine overdose and many of Davenport’s allegations of undue influence were aimed at Patricia [who] is also the personal representative of James LeFeber’s estate.” Cebull found that Patricia’s attorneys’ activities were relevant & necessary, stating that in light of the significant amount of money at stake — more than $1.5 million for Shane and $112,000 for Patricia — “the experienced and well-respected lawyers in this case were justified in expending significant resources on this case to ensure a good result for their clients,” the time expended “was multiplied by Davenport and her outrageous claims and lack of scruples,” and Patricia’s lawyers were “therefore required to thoroughly investigate Davenport’s claims, respond to more than twenty motions, and file their own motions — almost all of which were well-taken.” This Court is also persuaded by Dennis Lind who has been licensed for 42 years and is managing partner of an 18-attorney firm in Missoula. Lind affirms that Beal’s rates ($195/hr) are reasonable and appropriate based on his knowledge of and experience with local rates. He points out that Beal’s rates were actually below market rates in Missoula, and attests that all the work by Beal Law Firm was necessary, reasonable, and appropriate. Davenport fails to point to even one conference that was not “justified.”

Davenport objects that Patricia’s attorneys’ billing statements are so “vague” that she cannot evaluate the hours. They set out the rate of pay and billable hours in .1 increments of time, and break the hours out by client, subject, and date click to find out more. They are sufficiently clear that anyone can understand what work was done, for whom, for how long, and on what date. Baykeeper (ND Cal. 2011). Davenport’s objections and ability to list numerous issues with Patricia’s fee request prove the billing statements’ clarity.

Davenport argues that fees should not be awarded against her because she is indigent. This is not a proper objection to reasonableness of the award. The Court will construe it as seeking a 0 amount. She provided no evidence of indigency. She did not file an affidavit or file a claim of indigency or even provide any work history. The Court does not find her indigent and the fee award remains reasonable as it is.

Davenport argues that instead of spending $231 to prepare Thad Huse’s subpoena and $55 to serve it, Patricia could have just “retrieved the documents from Huse and given them to her other attorneys.” Huse represented James LeFeber and prepared his will. To acquire documents related to his representation of James Faller, Patricia had to subpoena them. Attorneys do not hand over documents regarding a client to another client simply with a simple request.

Davenport argues that Jacqueline LeFeber’s Declaration was unnecessary. However, her allegations against Jacqueline in her 3rd-party complaint necessitated the Declaration. It was Davenport’s actions that created additional work for everyone. That the Declaration was never used is irrelevant.

Davenport argues that Patricia’s motions to declare her a vexatious litigant and as to her Initial Disclosures were unsuccessful. That some motions were unsuccessful does not change Patricia’s entitlement to fees for them. Cabrales(9th Cir. 1991) (a party who is ultimately successful is entitled to all reasonable fees despite prior adverse rulings). Davenport provides no evidence that the time spent on either motion was excessive.

Davenport argues that fees incurred by Patricia responding to Davenport’s complaint to ODC and work on LeFeber’s probate case should not be included in the award. There are no billing entries related to the probate case, and the ODC fees stem directly from this case. Davenport filed her complaint against Patricia’s counsel for representing to Cebull that Davenport had been disbarred. In light of her conduct throughout this case and noting Cebull’s previous determination that she routinely engaged in vexatious conduct throughout the case, the Court perceives her ODC report as a mere litigation tactic.

Davenport argues that Patricia claims “thousands” of impermissible costs under 28 USC 1920, specifically, printing costs, deposition costs, and meals. All of these costs are recoverable under §1920, which requires that generation of taxable materials be “reasonably necessary for use in” the case “at the time the expenses were incurred.” Williams (10th Cir. 2009); Haagen-Dazs (9th Cir. 1990) (§1920(4) enables a court to award copy costs for any document “necessarily obtained for use in the case”). Patricia notes that the deposition costs were incurred in taking Davenport’s and Raymond Tipp’s depositions. One was a party and the other the decedent’s prior counsel. Both were used in Patricia’s motion for summary judgment. The summary judgment briefs citing both depositions are evidence enough. The costs are recoverable under §1920 and LR 54.1. Patricia’s counsel billed Patricia for lunch during the depositions. Lunch expenses are recoverable when billed to a client. Greenfield (D.Or. 2001).

This Court agrees with Cebull that the time spent was absolutely necessary and was neither redundant nor excessive and the fees & costs are reasonable. Patricia is entitled to $181,031.21 fees & costs to be deducted from Davenport’s share of the Scottrade account. Prejudgment interest is not available, as previously determined. Proceeds of LeFeber’s account will remain in the Court registry until any appeals have been concluded or the period for noticing an appeal has passed.

(Many of Davenport’s arguments and the Court’s conclusions as to Shane are similar to those for Patricia.) Davenport devotes 48 of her 50-page brief explaining why Shane should not get fees at all. As to the amount requested by Shane, she argues that the fees are “unreasonable and excessive.” As even the most recent filings make clear, the time Shane’s attorneys spent was and continues to be multiplied by Davenport’s refusal to obey orders and her prolific filings. Fred Simpson, whose 20-year practice consists primarily of civil litigation, affirmed that Jeffrey Oven’s and Michael Tennant’s rates ($245 for Oven and $180 for Tennant) are reasonable based on his knowledge of and experience with local rates. He pointed out that Davenport’s discovery requests requiring production of over 1,000 pages of documents as well as the intensive factual investigation to rebut her claims all played into the amount of hours. The Court accepts Oven’s and Simpson’s unrefuted testimony that the time spent was absolutely necessary and neither redundant nor excessive. The Court also accepts Shane’s attorney and paralegal rates ($120 for paralegal) as consistent with the amounts charged by skilled lawyers and paralegals in the community who handle these types of cases. An award of $139,953 fees is reasonable.

As to Davenport’s objections to Shane’s costs, Shane points out that $3,200 went toward retaining his medical expert Deric Weiss, whose testimony that LeFeber died of cancer was required only after Davenport frivolously alleged that Shane and the other beneficiaries conspired to murder him. Davenport asserted varying claims over the last 3 years, with just enough legal training to require significant argument and investigation to rebut them. Shane’s costs of $8,190.21 were reasonable & necessary to his defense.

Arnold Faller is entitled to $13,706.78 fees & costs, $11,189.10 of which has already been distributed to him, so $2,517.68 shall be deducted from Davenport’s share of the Scottrade account.

Scottrade v. Davenport et al, 42 MFR 404 (Patricia), 42 MFR 417 (Shane), 42 MFR 424 (Arnold), 4/10/15; 9th Circuit order 12-35711, 10/23/14.

Tom Singer (Axilon Law Group), Billings, for Scottrade; Kristine Davenport, Missoula, pro se; Jon Beal & Katie Ranta (Beal Law Firm), Missoula, for Fallers; Jeffrey Oven & Michael Tennant (Crowley Fleck), Billings, for Shane; Kimberly Chabot and Christopher Gibbons, pro se.

RR CROSSING COLLISION: RR failed to show that employee against whom negligence as to crossing safety resulting in train/truck collision is alleged was fraudulently joined in attempt to defeat diversity… no complete preemption by ICCTA, thus no federal question jurisdiction, as negligence claim would have “merely incidental” effects on RR’s operations… Plaintiff’s motion to remand granted… Watters.

(The facts are from Samuel Staley’s complaint.)

A BNSF mainline and a siding run through Hysham. The west crossing is protected by automatic gates and lights. The other, a quarter mile to the east, has only crossbuck signs. Lynn Ludwig was designated “point of contact” for any issues in Hysham in 9/12. Town officials began complaining to her that trains were standing unoccupied on the siding for extended periods and blocking the west crossing, forcing motorists to use the east crossing. Not only was the east crossing unprotected, parked trains blocked southbound motorists’ view of any approaching eastbound trains on the mainline. Ludwig and BN ignored the officials and continued to block the west crossing. Staley was driving a beet truck south through Hysham 10/13/13. A train was standing unoccupied on the siding in a manner that completely blocked the west crossing, forcing him to use the east crossing. As he approached the east crossing, the parked train blocked his view of the mainline. When he began crossing, an eastbound train collided with his truck, causing severe injuries.

Staley sued BN and Ludwig in State Court in 9/14 alleging that they breached the standard of care by repeatedly blocking the west crossing and forcing motorists to use the east crossing, obstructing the view of oncoming eastbound trains for southbound motorists at the east crossing, arrogantly ignoring complaints about the unsafe crossing practices, failing to sound a warning at the east crossing in violation of Montana and federal law, failing to operate the train at a safe speed when approaching the east crossing which constituted a “unique, specific and individual hazard,” failing to keep a proper lookout for vehicles approaching the east crossing, failing to install proper warning signs and signalization at the east crossing, and“otherwise failing to use due care under the circumstances.” Defendants removed to this Court on the basis of diversity. They acknowledge that Staley and Ludwig are Montanans, but contend that he fraudulently joined her to avoid federal jurisdiction. They also claim federal jurisdiction on the basis that his negligence claims are preempted by the ICCTA. Staley moved to remand, arguing that he pled sufficient facts to state a cause against Ludwig and that his claims are not completely preempted because even if successful they will not unreasonably burden BN’s operations as it had previously separated trains to avoid blocking the west crossing.

Both Staley and Defendants have attached additional evidence to their briefs. “Fraudulent joinder claims may be resolved by `piercing the pleadings’ and considering summary judgment-type evidence such as affidavits and deposition testimony.” Morris (9th Cir. 2001). In an email to Engineering Support Supervisor Josh Capps, town official Robert Keele raised the issue of rail traffic blocking the west crossing. Keele noted that

one of my council members did speak with the train master in Forsyth, and in response one train has been broken to allow crossing at this intersection. This occurred about a month ago and has not been done since.

Capps forwarded Keele’s email to Ludwig and stated:

I sent an email to the trainmaster regarding this issue 2 weeks ago, so if you and Rob make it into Forsyth please discuss this with him because the last train that was there had more than enough room to cut the crossing. Mr. Keele, Lynn Ludwig will now be your point of contact for any issues in Hysham since I no longer work in Montana.

However, Keele noted in an email to Ludwig 9/7/12 that although he may have been “beating a dead horse,” parked trains continued to block the west crossing, on one occasion for 2½ days. On 10/14/13, the day after Staley’s accident, Keele emailed Ludwig that he could not “begin to express the level of frustration I have with you and BNSF regarding this issue,” that his requests that BN modify its practice of blocking the west crossing “have gone largely unanswered and even more so, arrogantly ignored.” Ludwig responded that she had been in contact with the County regarding the crossing and had not ignored his complaints.

Defendants attached an affidavit from Ludwig in which she claims she had no involvement in placing the trains at the west crossing. She claims that as a roadmaster she only supervises employees maintaining the track and coordinates work at crossings, and in that capacity she “had contact with Treasure County officials on road and crossing surface issues.” Other BN departments determined where to place trains. She states that she did not ignore Keele’s complaints, but forwarded them to the proper department, and after that there was nothing more she could do. She also states that she had no authority as to placement of warning signs or lookouts at the east crossing.

Fraudulent joinder. Defendants have not met their burden of showing that Staley cannot state a cause against Ludwig. To hold the employee personally liable under Montana law, he must be either personally negligent or have taken “actions that were tortious in nature.” Crystal Springs (Mont. 1987). Where there are allegations against an employee personally, the Montana Supreme Court has allowed the employee to be named as a defendant. Dagel(Mont. 1991). Staley claims that Ludwig negligently ignored complaints and the alleged unsafe conditions at the west crossing. He points out that Keele’s previous point of contact, Capps, apparently played some role in rearranging a train that had been blocking the west crossing, and since he had left Montana he notified Keele that Ludwig would be the “point of contact for any issues in Hysham.” According to Staley, Ludwig ignored Keele’s emails until after Staley’s accident. He also claims that she never told Keele to contact someone else as to trains blocking the west crossing. These allegations are sufficient to pursue a negligence claim against Ludwig personally. The alleged lack of response and ignoring safety complaints support Staley’s claim that she was personally negligent. Ludwig’s general denial of Staley’s allegations that she ignored complaints is similar to an answer and is insufficient to overcome the burden of showing fraudulent joinder. “Were courts to find fraudulent joinder whenever presented with a defendant’s self-serving affidavit, few cases would ever be remanded and federal jurisdiction would greatly expand.” Smith (ED Ky. 2010). Ludwig’s affidavit shows that there is contradictory evidence as to Staley’s claim that safety complaints went “largely unanswered and … arrogantly ignored.”

Preemption. Defendants contend that this action would impermissibly manage or regulate train operations. The Court finds that, as alleged, it would not unreasonably burden or regulate BN’s operations, and thus, because the ICCTA does not wholly displace Staley’s negligence claims, it is not completely preempted. As in Elam (5th Cir. 2011), Staley is asserting simple negligence. He does not rely on Montana’s antiblocking statute, MCA 69-14-262, but alleges that BN created an unsafe condition that constituted a “unique, specific and individual hazard.” As alleged, the situation was not likely to be frequently replicated. Nor does Staley plead facts that would “unreasonably interfere with interstate commerce.” AAR (9th Cir. 2010). Nor has Congress manifested an intent for the ICCTA to preempt all negligence claims against railroads. Elam. Since ICCTA does not completely preempt a negligence claim that would have “merely incidental” effects on a railroad’s operations, id., Staley’s claims are not completely preempted. This does not mean that BN cannot raise a preemption defense in State Court, but only that the preemptive force of the ICCTA is not so strong that it preempts the entire area of negligence law against railroads. Therefore, Staley’s allegations are not “necessarily federal in character,” and this Court does not have federal question jurisdiction. Staley’s motion to remand is granted.

Staley v. BNSF and Ludwig, 42 MFR 386, 2/27/15.

Zander Blewett & Kurt Jackson (Hoyt & Blewett), Great Falls, for Staley; Jeff Hedger & Michelle Friend (Hedger Friend), Billings, for Defendants.

INSURANCE: Bad faith “fishing expedition that yielded no catch”… insurer delivered $4 million policy limits to Plaintiff’s attorney and 6 others to settle prior case against CPA firm… Plaintiff not informed that others would share in settlement, now sues insurer for bad faith failure to timely settle, leverage her into global settlement… Plaintiff’s counsel disqualified so she could testify as necessary witness to facts in prior case, co-counsel took over case, moved to disqualify insurer’s counsel… discovery violations and other bad faith by Plaintiff’s counsel… Judge recusal based on alleged bias against Plaintiff’s counsel and reliance on “extrajudicial source” (private practice experience) and outdated understanding of the law denied… summary judgment for insurer on bad faith claims… insurer awarded $107,868 fees/costs payable by Plaintiff’s counsel for retaliatory motion to disqualify Defendants’ counsel and expenses incurred by Defendants in compelling additional discovery… 104-page order… Lovell.

Underlying tort litigation. Billie Redding, 76, sold her ranch for $3.3 million in 2004. Seeking to avoid tax liability and provide income for herself and her son, she sought advice from Timothy Janiak, who had been her accountant for 20 years at Anderson ZurMuehlen. He steered her to AZ subsidiary Acquiron, formed with real estate broker Rick Ahmann, for a possible 1031 exchange. Acquiron advised tenancy-in-common shares of commercial properties sold by DBSI. With the advice of her personal attorney she decided to participate. DBSI declared bankruptcy 4 years later and her monthly payments became irregular and stopped. Acquiron recommended the same or a similar transaction for at least 6 other ranch clients, who likewise suffered loss of the rental payments. On 11/11/08, the day after DBSI declared bankruptcy, AZ reported to New York Marine Ins. that there was a potential for multiple claims. Redding sued AZ, Acquiron, her AZ accountant, and 2 Acquiron employees in 2009. Redding alleged that her TICs were unregistered securities and that AZ and Acquiron violated the Montana Securities Act and committed fraud and misrepresentation. The policy excluded claims arising from brokerage of unregistered securities. In 1/11 discovery was ongoing in Redding’s case, and AZ’s lawyers were preparing summary judgment motions on statute of limitations and whether the TICs were securities. They also believed that her $4.6 million in claimed damages were inflated by the fact that she had not reported all previous rental income from her TICs and that she claimed over $2 million from non-recourse mortgage debt acquired in the transaction but allegedly would never be required to repay. On 2/17/11 she made demand for the $2 million policy limit. Defendants requested that the 30-day response period be extended a few days to accommodate a mediation set for 3/23 and because they had not received an expert’s report as to damages. Redding rejected the request for an extension and the 30-day demand period expired. The mediation conference was held with Stuart Kellner. Defendants opened with an offer of $250,000, hoping to arrive at a settlement of $750,000-$900,000. Redding countered at $6.5 million and Kellner terminated the mediation. In 8/11 Judge McCarter ruled that Redding’s TICs were not securities.Redding (Mont. 2012) held 7/5/12 that they were. However, in 6/12 Redding and the 6 other claimants settled with AZ in a global settlement for $4.65 million. NYM contributed $4 million and AZ contributed $650,000 (representing its commission or fees). Redding’s share after fees & costs was $450,844.87. AZ was represented in the underlying litigation by Patrick HagEstad and Bradley Condra. Redding was represented by Richard Layne and Linda Deola. After filing Redding’s complaint, Deola acquired 5 other clients as sole counsel and served their complaints in 2011 & 12. The 7th claimant, Garrison Ranches, was represented by John Bloomquist. Redding testified that she did not find out that the other claimants existed until the insurance was divided. It is not clear even now that she understands that Deola was retained by the other claimants for the purpose of sharing the same limited proceeds that she was hoping would be hers alone. She believes that she is now suing NYM because it has not yet paid her “bill” in full. MRPC 1.7 requires a lawyer to refrain from taking on a new representation when “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client” unless each affected client gives informed consent in writing. The record does not demonstrate that this condition was met.

Underlying coverage litigation. NYM agreed to defend AZ under reservation of right to deny coverage based on exclusions. The 2008 policy had a $2 million limit (per claim and aggregate). It excluded criminal, dishonest, or fraudulent acts or omissions, deliberate misrepresentations, or intentional or knowing violations of the law, and claims arising from AZ’s or Acquiron’s capacity as a securities broker or dealer. Because the underlying facts were still being discovered and issues were being defined by motion practice in Redding’s State Court case, NYM took no further action as to coverage. It was particularly significant to the coverage case that McCarter decided that the TICs were not securities. 4 months after her ruling, AZ’s attorney Curt Drake filed a declaratory action against NYM and Redding, Chevalier Ranch, and Thieltges Farms as “stakeholders.” This action was removed to this Court. Because AZ settled with all claimants shortly after removal, this coverage case was never adjudicated. 5 months after settlement, in 11/12, the parties stipulated to dismissal of the coverage case. That declaratory action had sought a ruling that NYM owed a duty to indemnify AZ (it was already defending). There were serious factual & legal questions, adjudication of which would have determined whether there was $4 million coverage available on 2 policies, $2 million on 1 policy, no coverage on either policy, or only part coverage for some claims and not others on 1 or more policies. Both policies explicitly provided that before NYM could settle a claim AZ had to consent. Both were also “claims made and reported” policies: after the 1st claim was made, subsequent related claims were to be deemed submitted under the original policy year. While there would only be 1 deductible for all related claims, all related claims would be limited by the $2 million aggregate under the original policy year. NYM retained Robert Guite, San Francisco, who was sole attorney until that case was dismissed in 12/12. Deola represented Redding, Chevalier, and Thieltges. When it came time to settle in 5/12, AZ and Redding were concerned about what they would do if NYM refused to provide coverage for Redding’s claim and the other 5 claims. Drake and Deola discussed a proposal whereby Redding would settle separately with AZ, which would then assign to her its 1st-party bad faith and breach of contract claims against NYM (for failure to settle), allowing Redding to sue NYM for both her 3rd-party bad faith claim and AZ’s 1st-party bad faith and contract claims. There is nothing inherently wrong with such a Damron agreement. It must be reasonable in amount and not otherwise fraudulent, collusive, or against public policy. Tidyman’s (Mont. 2014). However, it must be preceded by some breach of the contract by the insurer such as would justify the insured’s breach of the standard cooperation clause. The key feature of the Damron proposal here would have been that Redding would release any claim she might have as to AZ’s assets, thereby releasing AZ from its excess liability. Drake circulated a settlement document to AZ and Redding, without NYM’s knowledge, that called for Redding to agree not to execute on AZ’s assets in return for a confession of judgment by AZ and a $10,000 payment to Redding. In 12/11, just before filing the coverage suit, Drake requested Deola’s permission to name Redding and several other of her clients as nominal defendants on the theory that they were “stakeholders” in the policies, and Deola consented. Because Drake was in charge of AZ’s coverage dispute with NYM, he was clearly adversarial to NYM throughout the underlying litigation, but it appears that he may have at certain points led the negotiations for settlement of the underlying action. He also gave Deola his opinions (adopted by her) as to availability of coverage through NYM and any other carriers relevant to NYM’s co-defendants Petersen and Ahmann. Sometime between 5/21 and 6/5/12 Drake told Deola that there would be $4 million in NYM coverage available to settle all claims. During early 2012, AZ was facing $10-$30 million in damage claims by 7 former clients, but it had only $4 million coverage at most (perhaps only $2 million or even 0). Drake apparently put out the suggestion of having AZ confess judgment and assign to Redding any right it had to a 1st-party bad faith claim against NYM in case NYM did not provide coverage and also to manage the problem of AZ’s excess liability. That AZ’s coverage was itself precarious only exacerbated the total risk. AZ believed that if it were made responsible for all damages alleged it would be forced into bankruptcy. The plan was to require the 7 claimants to give up their excess claims against AZ. When AZ’s officers & directors decided in 5/12 that they wished to settle all claims quickly, Drake contacted Deola to find out what she would demand for a global settlement. In early 6/12 while HagEstad was in Texas on vacation, Drake was leading the negotiations for AZ, and all 7 Plaintiffs agreed with AZ to settle for $4.65 million — $2 million from each of the 2 policies and $250,000 cash and $400,000 in 4 annual installments from AZ. On 6/5, upon learning from Deola that the claimants agreed to accept $4.65 million, HagEstad informed her and Drake that NYM had not agreed to pay any policy limits, much less 2 limits totaling $4 million. NYM ultimately agreed to contribute $4 million. AZ understood that its coverage dispute would remain. Condra transferred $4 million by hand delivery to Deola 7/27/12. She then distributed funds to Redding, her other clients, herself, and the other 2 Plaintiffs’ counsel. Before that payment occurred, a serious glitch arose in 7/12 when NYM received a draft of the settlement agreement. It was prepared by Drake, revised by Deola, and signed by all claimants, perhaps even before NYM had a chance to suggest any revisions. It did not provide a release of NYM. Of even greater concern to NYM, it specified that NYM was not released as to any violations of Montana insurance law. By this time all attorneys knew that Deola was threatening to sue NYM for bad faith after the tort claims settled, and that intention was clearly telegraphed in the settlement agreement. This apparently caused NYM consternation in the 2 weeks before it cut two $2 million checks. Nevertheless, it was undeterred from its previous agreement to fund the settlement. It did not require any release for itself. It informed AZ that it would make the $4 million payment but under reservation of rights to recoup it from AZ after the coverage adjudication. Alternatively, it proposed that AZ agree to indemnify it as to any future claims arising out of the coverage action or the underlying action. Deola testified that her percentage as to Redding was only 14% because she split her fee with Mike Layne, who received 19%. Her fee was 33% each as to 3 of her other clients and 30% as to her 2 other clients, for which she was sole counsel. She received $96,564.08 fees from Redding and $1.1 million from her other 5 clients.

Bad faith. Redding, represented solely by Deola, alleges, inter alia, that NYM acted in bad faith in settlement of her claim. Deola apparently believed that NYM prevented AZ from settling much earlier than it did. She testified in her deposition that “AZ had been telling me all along, we want to settle this case, it’s New York Marine that’s not putting up the money, they are the problem, not AZ.” The record clearly establishes that AZ did not decide to settle with Redding until days or weeks before it did. Indeed, before 6/15/12 there was no written consent from AZ to NYM that notified or requested it to settle. However, AZ did decide in 5/12 that it wanted all the claims settled because it felt (correctly as it turned out) that it had more exposure after the Montana Supreme Court oral argument 4/25/12, which did not go well for AZ. AZ CEO Gary Carlson summarized its position in a 5/25/12 email to its defense counsel and Pres. Don Laine:

From our point — the settlement negotiations with Deola must include the Garrison case, the Schinder case that is about to be served, as well as the “other” party she has contacted, as well her [Deola] ceasing to use the “list” she has of Acquiron transactions to obtain further cases against AZ or Acquiron.

Redding’s allegations now are that NYM failed to settle with Redding when she made a $2 million limit demand in 2/11, that NYM required the 6 other claimants to settle in a global settlement before it would settle with Redding (thereby leveraging Redding’s desire to settle in order to obtain a settlement with the other 6), and that NYM did not timely pay the proceeds after a global settlement was reached between the 7 claimants and AZ. As this bad faith case ground on, communications between opposing counsel became increasingly strained, particularly after NYM moved to disqualify Deola on the ground that she would be a necessary fact witness as to the settlement negotiations and her allocation of the proceeds. Deola responded by threatening to move to disqualify NYM counsel. The Court ultimately conducted a hearing and granted NYM’s motion. Brian Miller, one of her partners, then appeared, for Redding. The Court also refused to quash NYM’s deposition of Deola, which was not entirely successful since her memory of the underlying action was not good and she failed to bring documents such as the spreadsheet that detailed her distribution of the settlement funds. She had emailed opposing counsel that she was “likely to answer very few questions and [was] prepared to be held in contempt if necessary.” Further complicating the matter, 3 days before the deposition she disclosed additional documents that were redacted but with no privilege log. Miller filed a retaliatory motion for disqualification of NYM’s counsel Mark Goodman, which the Court viewed as “patently frivolous.”

In the months after Deola’s deposition, late discovery from AZ showed that she had failed to disclose certain relevant non-privileged documents including emails between her and AZ’s lawyers and Drake. The Court granted NYM’s motion for additional discovery, and also found that Redding, Deola, and her firm should be assessed fees & costs attributable to the motion. The Court declined to find her in contempt, but did find that she committed the alleged discovery abuses. NYM presented a bill to Redding’s counsel for $48,000. Miller responded by moving for recusal of the undersigned.

In spite of the Court’s efforts to keep this litigation moving toward resolution, Plaintiff’s counsel now claims to believe that the decisions that have gone against Plaintiff have been so unfair that — after 2 years of litigation and after NYM’s motion for summary judgment — it has become necessary for Miller to move for my recusal. His motion accuses me of being biased against Plaintiff’s counsel and having an outdated understanding of the law which constitutes an extrajudicial influence on the Court. In classic straw man argumentation, he misrepresents the Court’s statements and then proves them to be wrong. For example, he claims that the Court thinks that Redding should have released her future bad faith claims against NYM in exchange for insurance proceeds in the underlying case. Nothing could be further from the truth. The Court merely queried whether it was bad faith for Redding to refuse to release the insurer from her underlying claim in exchange for her receipt of insurance proceeds. The purpose of this questioning related to a then-pending question of whether another suit should be consolidated with this suit. It was Miller’s choice to misconstrue the Court’s question and leap to a judgment of the Court, which he has now fully developed in his recusal motion. Miller asserts that during the 6/10 hearing the Court inappropriately consulted an extrajudicial source: itself. He argues that it was inappropriate for the undersigned to consult recollections of 26 years of private practice, as mentioned at the hearing, and to rely on “deeply-held beliefs” about the law developed during those years, and therefore a judge’s recollection of private practice and knowledge of or beliefs about the law derived during decades of practice are an extrajudicial source of information that must be studiously ignored when judging cases. He cites no authority for this novel theory; it is a frivolous argument. Plainly, the Court has not relied on any extrajudicial source which would justify recusal. Plaintiff’s motion for recusal, NYM’s motion for summary judgment, and NYM’s motions for fees & costs were heard 9/19/14. Without the interference caused by a true extrajudicial source, Plaintiff cannot rely on Court orders to justify a motion for recusal. There is no extrajudicial source in this case. Absent that element, Plaintiff must point to evidence of the Judge’s deep-seated antagonism or favoritism, without resort to rulings. It appears that Plaintiff’s brief focuses primarily on the Court’s discovery rules. This is not sufficient, as a matter of law. Plaintiff can point to no statements or conduct by the Court that are intemperate or otherwise betray deep-seated antagonism or favoritism. The motion for recusal is denied.

NYM conducted a reasonable investigation of Redding’s claim. It had a reasonable basis in law and fact for contesting the claim and the amount. It did not leverage an undisputed claim to obtain the settlement of disputed claims. It did not delay its approval of the settlement or its payment of policy limits. Because under Montana law insurers are not found in bad faith if they have a reasonable basis for contesting a claim, NYM did not commit bad faith by declining to settle with Redding in 2 & 3/11. It conducted a reasonable investigation into her claim and had a reasonable basis in law for declining to settle at that time. Her leveraging claim that NYM unreasonably refused to settle with her in order to force a global settlement is not supported by the record, which shows that it was the insured who wanted a global settlement, and Redding and all the claimants cooperated in achieving that goal. NYM did pay $4 million to Deola, and there is no evidence to support Redding’s claim that it delayed paying policy limits ($4 million). This case turned out to be a fishing expedition that yielded no catch. NYM is entitled to summary judgment on Redding’s common law and statutory bad faith claims.

NYM requests attorney fees & costs pertaining to Redding’s motion to disqualify Goodman, which was deemed filed for a retaliatory purpose and to harass opposing counsel. The Court found the motion to disqualify Goodman “patently frivolous” primarily because Goodman appeared as secondary coverage counsel and only after a final settlement was reached between the claimants and AZ. He only wrote 2 emails to AZ as to post-settlement matters. As with so many of Plaintiff’s arguments, Deola sets up a straw man by misrepresenting NYM’s defense and then uses that misrepresentation to justify Miller’s frivolous motion to disqualify Goodman. NYM also requests fees/costs pertaining to its motion to compel discovery. The Court will grant fees in both instances. Plaintiff’s counsel, who never offered to settle the fee award, asks the Court to set the lodestar at the Montana rate exemplified by NYM’s local counsel Gary Zadick which is $250/hr. NYM objects to applying that rate to their San Francisco counsel and point out that even under Montana law the going rates for counsel in communities outside Montana can be considered when it is reasonable to do so. Ihler (Mont. 2000). NYM believes that their out-of-forum attorneys were reasonable because counsel were familiar with them and their case. It was reasonable for NYM to have engaged these counsel, especially since they are excellent attorneys and have proven their capability in this case. While the lodestar is generally applicable, an exception is made for sanctions imposed on contumacious & contentious counsel acting in bad faith. The out-of-forum rate (or more precisely, the differential between the local rate and the out-of-forum rate) is both sanction against attorney misconduct and partial restitution to NYM for fees that it must pay. Goodman’s established rate is $525/hr; Michelle Alborzfar’s rate is $450/hr. NYM requests $213,705.21 including $1,792.32 costs. The Court will order reimbursement for its principal counsel (Goodman, Alborzfar, Zadick) as to the motion to disqualify Goodman, motion to quash subpoena of Goodman, and hearing of the motion, but will order that only principal counsel’s fees & costs be paid as requested, in the total amount of $73,934.82. The itemization indicates possible overstaffing and inordinate time in research; time expended by the contract attorney (40.3 hours) and paralegal (95.1 hours) exceeded what was necessary to respond to Plaintiff’s motions. $73,934.82 represents a reasonable reimbursement for NYM for lost opportunities for employment of the defense team for the fixed nature of counsel’s reimbursement, for the high importance of the motion to NYM given Goodman’s position as lead counsel and the late stage of the proceedings, and for undesirability of the work itself (responding to a frivolous & retaliatory motion). NYM requests $66,095 fees and $1,810.22 costs for its motion to compel additional discovery and for contempt and monetary sanctions. The Court previously found that “Plaintiff did do all these things and did delay and obstruct the progress of discovery.” It found that Deola failed to produce documents responsive to the Court’s 2/3/14 order, failed to adequately search for documents in response to NYM’s requests (important emails between Deola and Drake), failed to prepare adequately to testify at her 1st deposition, prevented NYM from questioning her at her 1st deposition about her handling of the settlement funds when she was directed to do so by the Court, and prevented NYM from questioning her at her deposition about her communications with opposing counsel as to the settlement. The Court gave the parties 10 days to agree on NYM’s fees & costs attributable to the motion to compel, the hearing thereon, and Deola’s 2nd deposition, to be paid “by Plaintiff and her counsel.” Because they could not arrive at a stipulated amount, NYM moved for fees & costs, supported by a declaration, totaling $67,905.22. It also states that its counsel incurred $34,411.50 for preparing & filing the motion for fees & costs (not inclusive of future time preparing the reply brief), citing Clark (9th Cir. 1986) (argument that no fees recoverable for preparation of fee petition is frivolous). Thus the total fees & costs attributable to Plaintiff’s multiple discovery violations is $102,316.72. I will award $32,122.50 fees and $1,810.22 for the 3 lead/local defense counsel, for a total of $33,932.72. The reimbursement request for a junior associate (41.5 hours), a contract attorney (8.6 hours), and a paralegal (35.5 hours) are unnecessary hours devoted to researching the motion to compel discovery. Nor was NYM successful as to every item sought to be compelled. After further consideration I have determined that Redding should not be held responsible for this attorney misconduct.

The Court may refer the question of attorney misconduct for further consideration by the judges of the District of Montana.

Redding v. New York Marine Ins., 42 MFR 282, 2/27/15.

Linda Deola & Brian Miller (Morrison, Sherwood, Wilson & Deola), Helena, and Richard Layne (Layne Law Office), Portland, for Redding; Mark Goodman & Michelle Alborzfar (Hogan Lovells), San Francisco, and Gary Zadick (Ugrin, Alexander, Zadick & Higgins), Great Falls, for NYM.