Written By Jean Meyer
Though the history of the Abbey/Land v. Glacier Cosntr. Partners, LLC[1] dispute is long and sorted, it can be concisely summarized as arising from relatively straightforward facts. A real estate developer (Abbey/Land, LLC – “Abbey”) and a general contractor, Glacier Construction Partners, LLC (“Glacier”), both owned by the same individual owner, colluded to inflate a stipulated judgment concerning construction defect claims for a luxury home. The aim in doing so was to collect upon a $12 million stipulated judgment engineered by Abbey against Glacier for alleged construction defects from Glacier’s insurer, James River Insurance Company (“James River”).
Considering the detailed and convoluted procedural history of the case, a brief recitation of the facts giving rise to the dispute is impossible. That said, the Abbey/Land decision is noteworthy considering the Montana Supreme Court’s detailed analysis as to the permissible boundaries when an insured / defendant, in the context of its insurance carrier refusing to defend its insured from a claim, stipulates to a judgment with a covenant not to execute and an assignment of rights.
The Court in Abbey/Land began its analysis by noting that a stipulated judgment is “presumptively enforceable as the measure of damages” in such a context as described above. Though, the Court further observed that there exists “the opportunity for mischief in settlement negotiations where the insurer has declined involvement – which may be checked by judicial review whether the settlement amount stipulated is reasonable.” Thus, the “insurer will be bound by its insured’s settlement and any resulting judgment so long as the settlement is reasonable and not a product of collusion.” Because the facts in Abbey/Land ultimately presented one such case of collusion, the District Court and Montana Supreme Court concluded that the Stipulated Judgment was not the product of a good-faith arms-length transaction.
In arriving at this conclusion, the Montana Supreme Court summarized the deferential body of law concerning stipulated judgments. The Court noted, “[w]hen an insurer fails to provide a defense, it is not per se fraudulent or collusive for its insured to sign a consent judgment and assign its rights against the insurer to a third-party claimant and to receive a covenant not to execute in return.” Said differently, in executing such an agreement, the insured attempts to protect itself from the exposure to personal liability to which the insurer exposed it. Moreover, “[t]he insurer that breached its duty to defend bears the burden of showing that agreement was fraudulent or collusive.”
“The term ‘collusion’ implies the existence of some sort of agreement aimed at defrauding another otherwise breaking the law.” In this vein, an insurer seeking to establish “collusion” must point to evidence of an effort towards wrongdoing between its insured and the third-party claimant. “[L]ack of incentive to minimize the settlement amount, without more, [is] not sufficient to demonstrate collusion.” Interestingly, the Montana Supreme Court even held that the shared ownership of parties entering into a stipulated settlement agreement is not per se collusive. There is nothing inherently collusive in a real estate developer holding interests both in a company owning a real estate development project and in the construction business, or for those two entities to contract with one another.
The Montana Supreme Court then relied upon foreign authority in identifying relevant factors for the determination where collusion may exist: (1) where the parties cannot substantiate claims; (2) suspicious terms in the agreement; (3) concealment; (4) where an insured agrees to testify falsely to create coverage; (5) where an unreasonable settlement amount exists; (6) where the insured and the third-party claimant work together to manufacture a cause of action for bad faith; (7) when the purpose is to injure the interests of an absent or nonparticipating party, such as an insurer or non-settling defendant; (8) or where the facts and circumstances will lead a court to conclude that either fraud or collusion are present are limited only by the imagination of those who would cheat and deceive.
Applying these factors to the facts of the case, the Montana Supreme Court concluded that collusion was indeed present in Abbey/Land. “Among the noteworthy examples,” the Court observed that Glacier and Abbey amended their contract to expose Glacier to consequential damages after an arbitrator made findings suggesting Glacier’s responsibility for some of Abbey’s claimed damages. The Court noted that it was unlikely – absent collusion – a party in Glacier’s position would agree to amend the contract to expose itself to greater liability after its potential malfeasance.
In support of its ultimate conclusion finding collusion, the Montana Supreme Court also noted that e-mails documented Abbey directing its attorneys for the two companies to operate as a team on a unified strategy with Glacier and actively removed attorneys who attempted to defend against or did not support, “full-throatedly,” an overly inflated award.
The Montana Supreme Court also was persuaded by the District Court’s determination that there was no negotiation on damages; rather, Glacier [the defendant] worked closely to develop and increase Abbey’s damages and actively assisted in the maintenance of Abbey’s claims against.
Based on these factors, and others, the Montana Supreme Court concluded that the $12 Million stipulated judgment was a product of collusion. With this finding, instead of Abbey recovering $12 Million, the Court remanded Abbey’s case with instructions for dismissal. The Montana Supreme Court also affirmed the District Court’s award of $908,942.36 in attorneys’ fees awarded to James River in connection with its declaratory judgment against Abbey and Glacier. This was a devastating outcome for Abbey considering the fact that no party disputed that Abbey had indeed suffered damages (just not as much as claimed). But, “as amply recounted [in the Supreme Court’s Opinion], the parties did collude to artificially increase damages for an inflated judgment to enforce against the insurers” and dismissal of Abbey’s claims was an appropriate punishment in the eyes of the Court.
For additional information concerning stipulated judgments in Montana or about construction defect litigation in Montana, generally, you can reach Jean Meyer by telephone at (406) 219-8422 or by e-mail at meyer@meyerconstructionlaw.com
[1] Abbey/Land v. Glacier Constr. Partners, Ltd. Liab. Co., 433 P.3d 1230, 1234 (Mont. 2019).