Draggin' Y Cattle Co. v. Junkermier, Clark, Campanella, Stevens, P.C.

• Decision Date: 24 April 2019
• Docket Number: DA 17-0731
• Citation: 395 Mont. 316,2019 MT 97,439 P.3d 935
• Parties: DRAGGIN’ Y CATTLE COMPANY, INC. ; and Roger and Carrie Peters, Plaintiffs and Appellees, v. JUNKERMIER, CLARK, CAMPANELLA, STEVENS, P.C., Defendants and Appellees, New York Marine and General Insurance Company, Intervenor and Appellant.
• Court: Montana Supreme Court

395 Mont. 316
439 P.3d 935
2019 MT 97

DRAGGIN’ Y CATTLE COMPANY, INC. ; and Roger and Carrie Peters, Plaintiffs and Appellees,
v.
JUNKERMIER, CLARK, CAMPANELLA, STEVENS, P.C., Defendants and Appellees,

New York Marine and General Insurance Company, Intervenor and Appellant.

DA 17-0731

Supreme Court of Montana.

Argued: November 14, 2018
Submitted: November 20, 2018
Decided: April 24, 2019

For Appellant: Gary M. Zadick (argued), Ugrin, Alexander, Zadick, P.C., Great Falls, Montana

For Appellees: Timothy B. Strauch (argued), Strauch Law Firm, PLLC, Missoula, Montana, David R. Paoli, Paoli Law Firm, P.C., Missoula, Montana

For Amicus Montana Trial Lawyers Association: Justin P. Stalpes, Beck, Amsden & Stalpes, PLLC, Bozeman, Montana, Gregory Munro (argued), Attorney at Law, Missoula, Montana

Justice Beth Baker delivered the Opinion of the Court.

395 Mont. 321

¶1 This case arises from a stipulated settlement entered into by Roger and Carrie Peters and Draggin’ Y Cattle Company, Inc. (collectively, "Plaintiffs") with Junkermier, Clark, Campanella, Stevens, P.C. ("Junkermier"). Junkermier’s liability insurer, New York Marine and General Insurance Company ("New York Marine"), intervened to challenge the reasonableness of the settlement. After allowing limited discovery and holding a reasonableness hearing, the Eighteenth Judicial District Court, Gallatin County, determined that the stipulated settlement was reasonable and entered judgment against Junkermier. New York Marine appeals.

¶2 On appeal, we address whether the District Court properly found the settlement agreement reasonable when the insurer provided a defense under a reservation of rights throughout the relevant proceedings, but did not confirm coverage under the policy or file a declaratory action to determine coverage, declined to settle with Plaintiffs for policy limits, and misrepresented the policy limits.

439 P.3d 937

We hold on the facts of this case that the District Court improperly held that the stipulated agreement was reasonable. We reverse and remand for further proceedings consistent with this Opinion.

PROCEDURAL AND FACTUAL BACKGROUND

¶3 This is the fourth time this case has come before this Court on appeal.¹ We restate the facts applicable to the issues in this appeal.

¶4 Roger and Carrie Peters, husband and wife, own Draggin’ Y Cattle Company, formerly Alaska Basin Grazing Association. The Peterses have been ranching in Montana since the 1970s. The Peterses were longtime clients of Junkermier, working directly with Larry Addink for accounting services both for themselves and for their various businesses related to their ranching and cattle operations.

¶5 In 2004, Addink advised Plaintiffs that they could structure a sale of real property to their advantage as a tax-deferred exchange pursuant to Internal Revenue Code § 1031. Addink’s plan involved selling real estate owned by Alaska Basin and using those proceeds to buy other real estate owned personally by the Peterses. Attorney Max Hansen drafted the closing documents for the transaction. Hansen expressed concern to Roger Peters that the transaction would not

395 Mont. 322

qualify for tax deferment under § 1031 because the parties to the exchange were related—the property being purchased to replace the Alaska Basin property was owned by the principals of Alaska Basin. He wrote a letter to Addink expressing these concerns, but explained that he had not provided Plaintiffs with tax advice about the proposed exchange. He wrote that he was leaving tax advice about the transaction to Junkermier because it had structured the deal. The property sales involved in the transaction closed in January 2007.

¶6 In November 2007, Addink learned that, pursuant to a 2002 revenue ruling, the type of transaction he had structured for Plaintiffs was prohibited from qualifying for treatment as a § 1031 exchange by the related-party rule. Addink informed Junkermier of his discovery and Junkermier notified New York Marine of the possible claim against it. Junkermier did not inform Plaintiffs that the transaction would fail to qualify under § 1031 until February 6, 2008. At the February 6 meeting, Junkermier told Plaintiffs that the transaction failed to qualify because of new tax rulings that had changed the law on related parties. Junkermier explained that, due to these recent rulings, the taxes on the transaction could not be deferred and an estimated $2.5 million would be due in state and federal taxes in three weeks. Between the time Addink realized his mistake and Junkermier disclosed the tax consequences to Plaintiffs, the Peterses had taken on additional debt and closed on a deal to purchase the Mountain View Ranch. Roger Peters testified that they would not have purchased Mountain View Ranch had they known about the tax liability. Plaintiffs’ expert Robert Storey opined that the tax liability had a significant negative effect on Plaintiffs’ ability to retain adequate financing and operating capital to support the ranching operations and real estate financing. He opined that inability to retain adequate financing forced Plaintiffs to dramatically scale back their operations, leading to lost profits close to $8 million.

¶7 Addink and Junkermier crafted a plan to mitigate the tax consequences by seeking an extension for Plaintiffs’ 2007 tax filings, restructuring various entities in order to use losses to offset the gain, and negotiating with tax authorities to settle taxes, penalties, and interest due. Addink and Junkermier continued to provide accounting services to Plaintiffs until Plaintiffs terminated the firm in April 2009. Plaintiffs terminated Junkermier after Hansen—whom Plaintiffs had hired to negotiate a tax compromise with the IRS as part of the mitigation plan—told Plaintiffs that Junkermier had misinformed them

439 P.3d 938

about the reason the transaction failed to qualify under § 1031.

¶8 New York Marine began providing Addink and Junkermier a

395 Mont. 323

defense as early as 2008 against potential claims Plaintiffs could bring. As part of these efforts, New York Marine hired Patrick HagEstad to defend Addink and Junkermier. Plaintiffs filed a complaint in January 2011 against Addink and Junkermier alleging professional negligence, breach of fiduciary duty, and breach of contract. Plaintiffs’ first amended complaint, filed in February 2012, included additional allegations of breach of the implied covenant of good faith and fair dealing, misrepresentation, deceit, and constructive fraud, as well as a claim for punitive damages.

¶9 Shortly after the Peterses filed their first amended complaint, New York Marine issued a reservation of rights letter. New York Marine’s letter disclaimed any coverage for fraud or punitive damages. Its final paragraph stated, "nothing herein or heretofore should be construed as an admission of coverage or liability by [New York Marine], or as a waiver, estoppel or modification of any of the terms, conditions or limitations of the [New York Marine] Policy and [New York Marine] reserves all rights, remedies and defenses, legal and equitable."

¶10 Throughout the litigation, HagEstad reported to Addink, Junkermier, and New York Marine that the case was defensible and that Plaintiffs most likely would recover less than $250,000 if they succeeded in getting a verdict at trial. On June 10, 2014, Plaintiffs offered to settle all claims against Junkermier and Addink for the policy limits of $2 million in exchange for a full and final release of all claims. HagEstad advised the parties to seek independent counsel, because Plaintiffs’ policy limits demand raised issues outside the scope of his representation.

¶11 Addink and Junkermier each retained independent counsel following the policy limits demand. Addink’s independent counsel contacted HagEstad and informed him that Addink wanted the case settled within policy limits because Addink believed there was "significant risk" the verdict would be in excess of policy limits. Junkermier also sent a letter to New York Marine demanding that it settle the case within policy limits. HagEstad forwarded the policy limits demand to New York Marine on June 23, 2014, along with his assessment of the case. HagEstad maintained in his letter to New York Marine that he did not think the case was worth more than $250,000. HagEstad explained his views that Plaintiffs were contributorily negligent, that the taxes were not recoverable as damages, and that other claimed damages were speculative. He conceded that if Plaintiffs succeeded on the outstanding legal issues, however, "the damages could be significantly closer to those stated by Plaintiffs in their

395 Mont. 324

demand letter." At the time of the policy limits demand, Roger and Carrie Peters, Hansen, and Plaintiffs’ damages experts had not been deposed.

¶12 New York Marine, relying on HagEstad’s counsel, authorized a counteroffer of $100,000, which HagEstad offered to Plaintiffs on July 11, 2014. Plaintiffs did not respond to this counteroffer before the mediation...