Haines Pipeline Const., Inc. v. Montana Power Co.

Decision Date20 June 1994
Docket NumberNo. 93-416,93-416
Citation876 P.2d 632,265 Mont. 282
PartiesHAINES PIPELINE CONSTRUCTION, INC., Plaintiff/Appellant, v. MONTANA POWER COMPANY, Defendant/Respondent.
CourtMontana Supreme Court

Randy J. Cox & Sam E. Haddon, Boone, Karlberg & Haddon, Missoula, for plaintiff/appellant.

Bruce R. Toole & Donald L. Harris, Crowley, Haughey, Hanson, Toole & Dietrich, Billings, for defendant/respondent.

NELSON, Justice.

Haines Pipeline Construction, Inc., (Haines) appeals from a judgment entered on August 9, 1993, in favor of Montana Power Company (MPC) and against Haines on all claims set forth in its Third Amended Complaint. The District Court, Second Judicial District, Silver Bow County determined that Haines had failed to prove fraud or constructive fraud which would entitle Haines to recover any damages, either actual or punitive. We reverse and remand.

We state the issues on appeal as follows:

(1) Did the District Court err in refusing to apply findings of fact and conclusions of law issued by the District Court in Haines I and affirmed on appeal to determine if Haines was entitled to summary judgment?

(2) Did the District Court err in holding a de novo trial after which it issued findings of fact and conclusions of law contrary to the findings and conclusions affirmed on appeal from Haines I?

This same case was before us on appeal in Haines Pipeline Constr. v. Montana Power (1991), 251 Mont. 422, 830 P.2d 1230 (hereinafter Haines I ), where Haines sued MPC for bad faith and breach of contract. The underlying facts giving rise to the cause of action are set forth in Haines I, and, as necessary to the determination of this case, are restated here.

In June 1983, Haines and MPC entered into a written contract for the construction of a 16 inch natural gas pipeline from Warm Springs to Cut Bank, Montana. In lieu of a construction bond, the parties required Haines to post an irrevocable letter of credit in the amount of $750,000 in favor of MPC, and to maintain such letter of credit until final acceptance and payment of the work under the contract.

Construction of the pipeline required that Haines weld sections of the pipe in accordance with procedures developed by MPC and in compliance with federal regulations. No welds were buried unless they had been inspected and approved by MPC and Gamma Sonics (Gamma), a company hired by MPC to provide X-ray inspection of the welds.

The project had regulatory problems which were brought to the attention of the Montana Public Service Commission (PSC) by labor leaders and the Department of Transportation. Hearings were held on several alleged federal safety violations, regarding primarily the padding of the bed underneath the pipeline. To avoid further hearings, MPC developed a "plan to demonstrate fitness for service" of the portion of the pipeline that had been constructed and agreed to postpone further construction.

On April 16, 1984, the letter of credit was reduced to $250,000 and the parties agreed to extend the expiration date to November 15, 1984. On April 23, 1984, the construction contract having been suspended pursuant to the fitness plan, the parties entered into a settlement agreement covering all work done to that date.

MPC hired Southwest Research Institute (SRI) to re-check the X-ray inspection of Gamma. Haines and MPC entered into a second contract on May 8, 1984, whereby Haines was to assist MPC in doing miscellaneous repair work on the completed portion of pipeline including repair of buried pipeline identified by SRI as defective. Under this contract Haines was paid as an independent contractor on an hourly basis.

On October 15, 1984, MPC Chief Executive Officer, Paul Schmechel, distributed a memorandum in response to the board of directors' concerns about the pipeline. The memorandum indicated that MPC would "move Haines off the job" by mid-November. Furthermore, the memorandum indicated that the letter of credit was set to expire on November 15, and that the circumstances surrounding repair work were being reviewed to determine if claims should be made against Haines.

On October 22, 1984, Haines as a "good faith gesture" extended the letter of credit until May 15, 1985, at the request of MPC. On November 16, 1984, MPC terminated the June 1983 contract with Haines, pursuant to paragraph 31.0, allowing MPC to terminate at its convenience.

MPC conducted an internal audit of the pipeline construction. The audit focused on the shortcomings of MPC's supervision of Haines and Gamma. One of the recommendations of the audit was to proceed against Gamma for the cost of digging up the pipeline and making the necessary repairs. It was later determined that Gamma had insufficient assets to pursue.

In January of 1985, MPC retained a law firm to advise the company if it had a claim against Haines for the cost of fixing defective welds. MPC did not provide the firm with the audit report. MPC received an opinion letter from the law firm on May 10, 1985, advising MPC that it could assert both contractual and negligence claims against Haines to recover the costs MPC would incur in repairing the defective welds.

Subsequently, MPC attorney, Robert Gannon, recommended to MPC's vice chairman, Jack Burke, that MPC draw upon the $250,000 letter of credit which was due to expire Wednesday, May 15. Gannon concluded that the costs of repairing the welds would substantially exceed the value of the letter of credit. On Tuesday, May 14, Gannon and Burke met with MPC's CEO, Paul Schmechel, to obtain authority to draw upon the letter of credit.

On May 15, 1985, MPC drew upon the letter of credit after informing Haines that it had failed to perform proper welding under the contract. Haines responded stating that it had no further responsibility for the welds once they had been X-rayed, approved, and the pipe buried.

Haines initiated an action in the Second Judicial District Court, Silver Bow County to recover damages against MPC for breach of the construction contract. After a bench trial the District Court entered its findings and conclusions. The court ruled that MPC had accepted Haines' work, had no authority to draw upon the letter of credit and that presentment of the letter of credit constituted a breach of the construction contract. Furthermore, the District Court concluded that MPC misled Haines into extending the letter of credit constituting a breach of the implied covenant of good faith and fair dealing. Finally, the court concluded that the breach was oppressive conduct justifying the imposition of punitive damages.

MPC appealed the District Court's judgment awarding Haines compensatory and punitive damages. Regarding the compensatory damages, we affirmed in part and reversed in part. As to the punitive damages, we reversed and remanded, granting the parties leave to amend their pleadings. We remanded the award of punitive damages, because of the intervening change of law in Story v. City of Bozeman (1990), 242 Mont. 436, 791 P.2d 767, which eliminated the award of tort damages for breach of the covenant of good faith and fair dealing, absent a special relationship. We allowed the parties to amend their pleadings to allege fraud, or other theories consistent with our decision in Haines I.

Following the remand (hereinafter Haines II ), MPC substituted Judge Olson, the District Court judge who had tried Haines I. Haines filed a Third Amended Complaint alleging fraud and constructive fraud. Haines moved for summary judgment based upon the findings and conclusions of the District Court in Haines I, affirmed by this Court, that MPC wrongfully enticed Haines into extending the letter of credit. The District Court in Haines II, denied the motion and stated in its memorandum that:

It is noted that Judge Thomas Olson's Findings and Conclusions were based upon evidence produced in support of the Second Amended Complaint. The District Court found for Plaintiff and the Supreme Court affirmed there was a Breach of the Covenant of Good Faith and Fair Dealing and consequently a Breach of the Contract. The Findings and Conclusions of Judge Olson are the law of that case. (Emphasis added.)

The District Court went on to state,

this Court feels that this matter should be tried de novo to determine if Fraud or Constructive Fraud did in fact exist. (Emphasis in original.)

The District Court retried the case and found that Haines had failed to prove either actual or constructive fraud. In doing so, the District Court made findings directly contrary to the findings of fact and conclusions of law in Haines I, which were affirmed by this Court. On August 9, 1993, judgment was entered in favor of MPC and against Haines on all claims set forth in its Third Amended Complaint. Haines appeals from this judgment.

Haines contends that the District Court failed to properly apply the doctrines of collateral estoppel and law of the case when it made findings which were directly contrary to the findings in Haines I. We address each doctrine in turn.

I. COLLATERAL ESTOPPEL

The doctrine of collateral estoppel is similar to the doctrine of res judicata. The doctrines differ in that res judicata bars the same parties from relitigating the same cause of action, while collateral estoppel bars the party against whom the claim is asserted, or a party in privity with the earlier party, from relitigating issues which have been decided with respect to a different cause of action. Boyd v. First Interstate Bank (1992), 253 Mont. 214, 218, 833 P.2d 149, 151. The collateral estoppel bar extends to all questions essential to the judgment which were determined by a prior judgment. Boyd, 833 P.2d at 151.

It is well established that this Court applies a three part test to determine if collateral estoppel bars relitigation of an issue. Aetna Life and Casualty Insurance Company v. Johnson (1984), 207 Mont. 409, 413, 673 P.2d 1277, 1279; In re Marriage of...

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