Farr v. Designer Phosphate and Premix Intern., Inc.

• Decision Date: 17 October 1997
• Docket Number: No. S-95-166,S-95-166
• Citation: 570 N.W.2d 320,253 Neb. 201
• Parties: Sophia FARR et al., Appellants and Cross-Appellees, v. DESIGNER PHOSPHATE AND PREMIX INTERNATIONAL, INC., Appellee, and Farm Bureau Insurance Company of Nebraska, Garnishee-Appellee and Cross-Appellant.
• Court: Nebraska Supreme Court

Page 320

570 N.W.2d 320

253 Neb. 201

Sophia FARR et al., Appellants and Cross-Appellees, v. DESIGNER PHOSPHATE AND PREMIX INTERNATIONAL, INC., Appellee, and Farm Bureau Insurance Company of Nebraska, Garnishee-Appellee and Cross-Appellant.

No. S-95-166.

Supreme Court of Nebraska.

Oct. 17, 1997.

Syllabus by the Court

1. Garnishment: Appeal and Error. Garnishment is a legal proceeding. To the extent factual issues are involved, the findings of a garnishment hearing judge have the effect of findings by a jury and, on appeal, will not be set aside unless clearly wrong.

2. Appeal and Error. To the extent issues of law are presented, an appellate court has an obligation to reach independent conclusions irrespective of the determinations made by the court below.

3. Insurance: Negligence: Intent: Words and Phrases. A volitional act does not become an accident simply because the insured's negligence prompted the act. Injury that is caused directly by negligence must be distinguished from injury that is caused by a deliberate and contemplated act initiated at least in part by the actor's negligence at some earlier point. The former injury may be an accident. However, the latter injury, because it is intended and the negligence is attenuated from the volitional act. is not an accident.

4. Insurance: Liability: Time. The time of the occurrence of an accident within the meaning of a liability indemnity policy is not the time that the wrongful act was committed, but the time when the complaining party was actually damaged.

Alan V. Johnson, of Sloan, Listrom, Eisenbarth, Sloan & Glassman, Topeka, KS, and Dale M. Shotkoski, of Shotkoski & Mellon, Central City, for appellants.

Gary J. Nedved, of Bruckner, O'Gara, Keating, Henry, Davis & Nedved, P.C., Lincoln, for appellee Farm Bureau Ins. Co.

WHITE, C.J., and CAPORALE, WRIGHT, CONNOLLY, and GERRARD, JJ., and FLOWERS, D.J., and BOSLAUGH, J., Retired.

GERRARD, Justice.

INTRODUCTION

The appellants, Sophia Farr and others who are all minority shareholders in the appellee Designer Phosphate and Premix International, Inc. (DPPI), sought to collect a stipulated judgment which had been entered against the judgment debtor, DPPI, in the U.S. District Court for the District of Nebraska regarding DPPI's sale of unregistered stock certificates. In the instant case, the appellants instituted a garnishment proceeding in Merrick County District Court against Farm Bureau Insurance Company of Nebraska (Farm Bureau), the liability insurer of DPPI. Following a bench trial, the district court dismissed the appellants' garnishment proceeding, finding that the stipulated judgment did not impose liability on DPPI within the meaning of the Farm Bureau general liability policies in effect during the relevant time periods. The appellants filed this appeal, and Farm Bureau cross-appeals. Because we conclude that the conduct at issue did not constitute an "occurrence" that would create liability under the liability policies, we affirm the judgment of the district court.

FACTUAL BACKGROUND

This action arises out of the appellants' investment loss in DPPI. DPPI was in the business of processing premix livestock feed supplements and was managed on a day-to-day basis by Tim Tobiason. The appellants are a group of minority shareholders in DPPI referred to as the "Kansas group." Tobiason and shareholders supportive of him composed the majority of DPPI's shareholders. DPPI was formed in January 1989 as a result of the consolidation of four separate companies referred to as the "Designer Companies." The appellants were all shareholders in the various Designer Companies. Upon consolidation, the appellants tendered their Designer Companies stock certificates in exchange for stock certificates in DPPI.

The appellants became dissatisfied with DPPI's performance and Tobiason's management. In August 1989, Lloyd Farr, then a member of the board of directors of DPPI In regard to the allegation of negligent misrepresentation, the appellants asserted that Tobiason negligently made misstatements of material facts or negligently failed to disclose material facts in connection with the sale of stock in DPPI and the Designer Companies, the consolidation of the Designer Companies into DPPI, the financial condition of DPPI, and the future prospects of DPPI. The alleged material misstatements of fact included (1) that interest in the phosphate process developed by DPPI would generate several million dollars per year in income from licensing fees and additional income from the sale of equipment to licensees to process phosphate; (2) that DPPI had licensed manufacturers in approximately 20 foreign countries as well as the United States and that " 'this appears to promise [DPPI] a potential of millions of dollars of income in the years ahead' "; (3) that DPPI had a new project to convert corn into soybean meal and that it " 'promises much greater income than anything else we have ever done' "; (4) that the phosphate plant could yield profits of $500,000 to $1.35 million per year and that there would be no increase in labor or management of sales costs, " 'as all expenses have been in place one year' "; (5) that the phosphate plant started commercial scale production on February 9, 1989, and would generate sales of $250,000 per month and increase profits by $40,000 per month within the next 1 to 2 weeks; (6) that Tobiason had superior management ability and knowledge beneficial to DPPI and its shareholders; and (7) that the consolidation of the Designer Companies into DPPI was done to comply with federal securities laws. In June 1993, the parties entered into a settlement agreement in which DPPI consented to entry of a judgment against it in the sum of $600,000, but only as to the appellants' negligent misrepresentation claim. All other claims were dismissed with prejudice as part of the settlement.

contacted Nebraska's Department of Banking and Finance to see if DPPI had complied with the requirements of the Securities Act of Nebraska. An investigation revealed that DPPI had failed to register its stock pursuant to the act. In June 1990, the department told Tobiason that DPPI needed to remedy its sale of unregistered stock with a rescission offer to existing shareholders. Tobiason refused, and he was eventually removed from the board of directors in September 1990. Tobiason's actions prompted the appellants to file a lawsuit in federal district court. [253 Neb. 203] This suit asserted several theories of recovery, including violations of federal securities law, the Kansas Securities Act, and the Securities Act of Nebraska, as well as breach of fiduciary duty, common-law fraud, common-law negligence, and negligent misrepresentation.

The appellants sought to collect their judgment in a garnishment proceeding against Farm Bureau, holder of three liability insurance policies issued to its insured, DPPI. The first identified insurance policy, a special multiperil policy, in effect from March 22, 1987, through March 22, 1990, had a property damage liability clause that provided, in pertinent part: "The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of ... property damage to which this insurance applies, caused by an occurrence...." Occurrence is defined as "an accident ... which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured." Property damage is defined, in part, as "loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period."

The second policy, a business protector umbrella liability policy, in effect from June 1, 1988, through August 4, 1989, defined the operative terms "property damage" and "occurrence" in precisely the same way as they were defined in the special multiperil policy. A third policy, a commercial policy, in effect from February 22, 1989, through February 22, 1991, had a property damage coverage clause that provided essentially the same type of coverage as the special multiperil policy. In the commercial policy, the operative term "occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Property damage is defined, in pertinent part, as "[p]hysical injury The appellants filed an application for determination of garnishee liability, controverting Farm Bureau's answers by identifying the three aforementioned liability policies and claiming that these policies provide coverage for the $600,000 judgment obtained by the appellants against DPPI. Farm Bureau answered the appellants' garnishment interrogatories, denying indebtedness to DPPI or having any property of DPPI's in its possession.

to tangible property ... or [l]oss of use of tangible property that is not physically injured."

Following a bench trial, the district court found in favor of Farm Bureau and dismissed the appellants' cause of action. Specifically, the district court concluded that the claimed negligence preceded the February 22, 1989, effective date of the commercial policy and that the two remaining liability policies did not protect against this risk, since there was no " 'occurrence' " within the meaning of the policies and the loss of the appellants' investment is not " 'property damage' " within the meaning of the policies.

ASSIGNMENTS OF ERROR

The appellants assert that the district court incorrectly concluded that DPPI's admitted negligent misrepresentations did not constitute an "occurrence" and that the loss suffered was not "property damage" within the meaning of Farm Bureau's liability insurance policies.

Farm Bureau cross-appeals, contending that the district court erred in failing to find that the settlement agreement was a result of bad faith and not binding on Farm Bureau.

SCOPE OF REVIEW

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