Himes v. Safeway Ins. Co., No. 1 CA-CV 01-0532

• Decision Date: 27 March 2003
• Docket Number: No. 1 CA-CV 01-0532, No. 1 CA-CV 02-0410.
• Citation: 205 Ariz. 31,66 P.3d 74
• Parties: Patricia A. HIMES, Guardian/Conservator of Holly Lyn Castano, an incapacitated adult; Patricia A. Himes, individually, Plaintiffs-Appellees, Steven Duane Botma, Defendant-Appellee, v. SAFEWAY INSURANCE COMPANY, Intervenor-Appellant.
• Court: Arizona Court of Appeals

66 P.3d 74

205 Ariz. 31

Patricia A. HIMES, Guardian/Conservator of Holly Lyn Castano, an incapacitated adult; Patricia A. Himes, individually, Plaintiffs-Appellees, Steven Duane Botma, Defendant-Appellee, v. SAFEWAY INSURANCE COMPANY, Intervenor-Appellant.

Nos. -0532, -0410.

Court of Appeals of Arizona, Division 1, Department A.

March 27, 2003.

Beale, Micheaels & Slack, P.C., by John A. Micheaels and Roush, McCracken, Guerrero, & Miller, by Charles D. Roush and Sanders & Parks, P.C., by Steven D. Leach, Phoenix, Attorneys for Plaintiffs-Appellees Himes.

Don Stevens, P.C., by Don C. Stevens, II, Phoenix, Attorneys for Defendant-Appellee Botma.

Jones, Skelton & Hochuli, P.L.C., by Donald L. Myles, Jr., Randall H. Warner, Phoenix, Attorneys for Intervenor-Appellant Safeway.

OPINION

BARKER, Presiding Judge.

¶ 1 We examine in this opinion¹ the burden of proof and legal standard applicable in determining to what extent a Damron/Morris agreement² represents a reasonable settlement that is binding on an insurer.

I.

¶ 2 Holly Castano ("Castano") was severely injured in an automobile accident. Without attempting to fully describe her injuries, we note that Castano suffered a diffuse axonal injury to her brain which resulted in spastic quadreparesis.³ She has no use of her left arm or leg. She can slightly move her right leg and has limited use of her right arm. She has the ability to communicate but suffers distorted long term and short term memory problems. Some evidence put the cost of her past and projected medical care at $7 million.

¶ 3 Castano's mother, Patricia Himes ("Himes"), sued Steven Botma ("Botma") on behalf of herself and Castano. Botma, an insured of Safeway Insurance Company ("Safeway"), was the driver of the car which caused the collision with the vehicle in which Castano was a passenger. Safeway insured Botma under a policy which provided him the minimum statutory limits of $15,000 per person and $30,000 per accident. Himes also sued General Motors Corporation ("GM") and Joe Gambino Chevrolet ("Gambino"), the manufacturer and distributor, respectively, of the car in which Castano was riding. Himes contended that Castano's passenger seat was defective and collapsed during the collision, causing her injuries to be more severe.

¶ 4 Safeway retained counsel for Botma. That counsel filed an answer and counterclaim on Botma's behalf. The counterclaim alleged that Botma's liability had been extinguished by Himes' acceptance of a policy limits settlement. The counterclaim was severed for trial and tried to a jury. The jury found in favor of Himes, concluding that there had been no settlement.

¶ 5 After the trial against Botma was completed, and the case against GM and Gambino was set for trial, Botma and Himes entered into a Damron/Morris agreement. Botma consented to have judgment entered against him in the amount of $12 million and assigned all of his rights against Safeway to Himes, and in return Himes agreed not to execute against Botma's personal assets. The basis for the Damron/Morris agreement was Botma's contention that Safeway had breached its duty to give equal consideration to Botma's interests by failing to settle the case within policy limits, thereby freeing Botma to negotiate a settlement to protect his personal assets.

¶ 6 Judgment was entered against Botma in accordance with the Damron/Morris agreement on March 21, 2000. The product liability claim against GM and Gambino proceeded to trial. After a nine-week trial, and while the jury was deliberating, the claims against GM and Gambino were settled and dismissed with prejudice.

¶ 7 Prior to entry of the stipulated judgment, Safeway was allowed to intervene as of right under Arizona Rule of Civil Procedure 24(a). Safeway filed a motion, and then an amended motion, for new trial and for judgment as a matter of law as to the verdict and judgment in favor of Himes on Botma's counterclaim. The trial court denied the motion.⁴ Safeway also requested, and was granted, an evidentiary hearing as to the reasonableness of the settlement between Botma and Himes. Safeway also moved the trial court to withhold entry of the stipulated judgment until the amount of the judgment had been proved to be reasonable. The trial court denied this request.

¶ 8 Following the evidentiary hearing, the trial court ruled that the $12 million Damron/Morris agreement was reasonable to the extent of $9 million. Himes then moved for reconsideration of this determination. After briefing, the trial court modified its earlier decision and found the entire $12 million settlement to be reasonable. It is this determination that forms the primary focus of our analysis.

¶ 9 Safeway next filed a motion for new trial and judgment as a matter of law on the issue of reasonableness. This motion was denied and Safeway filed a timely notice of appeal.

II.

¶ 10 The key issues presented in this case deal with the burden of proof and applicable standard in determining an appropriate settlement amount after a Damron/Morris agreement has been made. We also address the evidentiary issues and factors considered in determining the reasonableness of a settlement pursuant to a Damron/Morris agreement. Finally, we consider whether the trial court erred in entering the judgment prior to a determination of reasonableness and whether this particular Damron/Morris agreement is an illegal and unenforceable contract.

III.

¶ 11 Safeway contends that the "purpose of a Morris Hearing is to obtain an independent determination from the court on reasonableness."⁵ Himes, on the other hand, in the motion for reconsideration granted by the trial court, urged that "the role of the trial court in passing on the amount of a proposed agreement under [Damron and Morris] is to enter judgment in accordance with the agreement of the parties unless (1) fraud or collusion has been shown or (2) the amount of the agreement is per se unreasonable." The trial court apparently accepted Himes' argument. In granting the motion for reconsideration it stated, in part, that:

It is not appropriate for this Court to substitute its belief of what was reasonable absent evidence to the contrary. This Court has no evidence that the agreement was unreasonable.

Himes' position, as reflected in this statement by the trial judge, is wrong. It is wrong both as to the burden of proof and as to the applicable standard in determining whether a settlement amount following (or in) a Damron/Morris agreement is reasonable and thus binding upon the insurer.

A.

¶ 12 As to the burden of proof, Himes' position—that a trial court must approve a settlement as reasonable "unless . . . the amount of the agreement is per se unreasonable"⁶—is directly contrary to our cases. In Morris, our supreme court noted case law to the effect that

neither the fact nor amount of liability to the claimant is binding on the insurer unless the insured or claimant can show that the settlement was reasonable and prudent.

154 Ariz. at 120, 741 P.2d at 253 (citing Miller v. Shugart, 316 N.W.2d 729, 735 (Minn.1982)) (emphasis added). Morris went on to plainly declare that "the indemnitor will be liable to the indemnitee to the extent that the indemnitee establishes that the settlement was reasonable and prudent under all the circumstances." 154 Ariz. at 120, 741 P.2d at 253 (emphasis added). The burden is squarely on the insured to prove reasonableness of the settlement amount that is either stipulated to or sought. Strojnik v. Gen. Ins. Co., 201 Ariz. 430, 432, ¶ 5, 36 P.3d 1200, 1202 (App.2001); Munzer v. Feola, 195 Ariz. 131, 136, ¶ 29, 985 P.2d 616, 621 (App.1999).

¶ 13 As Himes argues, however, the trial judge noted this burden of proof as being on the insured in making his ruling.⁷ He expressly cited Morris and noted the burden was on the claimant. In applying that burden, however, it is clear that the trial judge either (a) accepted an erroneous legal argument made by Himes, that the claimant satisfied her burden unless the settlement amount was "unreasonable per se" or that the burden shifted to the insurer upon a prima facie showing by the claimant, or (b) engaged in a clear error of fact by finding that "[t]his court has no evidence that the settlement was unreasonable."

¶ 14 As to the erroneous legal arguments made to the trial judge, we have already noted that the view of Morris advanced by Himes is simply not the law. A trial judge must not "pass" on a settlement amount, even if stipulated to by experienced lawyers acting in good faith, "unless it is per se unreasonable." The claimant has an affirmative duty of proof that the agreement is reasonable. Morris, 154 Ariz. at 120, 741 P.2d at 253. Liability only may exist "to the extent" the claimant proves the amount reasonable. Id.

¶ 15 Himes also argued in her motion for reconsideration that Morris should be interpreted in light of Pruyn v. Agricultural Ins. Co., 36 Cal.App.4th 500, 42 Cal.Rptr.2d 295 (1995). In that case, a California appellate court ruled that a negotiated settlement "will raise an evidentiary presumption in favor of the insured (or the insured's assignee) with respect to the existence and amount of the insured's liability. The effect of such a presumption is to shift the burden of proof to the insurer to prove that the settlement was unreasonable or a product of fraud or collusion." Id. at 299. This is not the law in Arizona. Morris, 154 Ariz. at 120-21, 741 P.2d at 253-54. We reject it.⁸ As we discuss in detail below, there is no incentive for an insured in such a setting to agree to a settlement amount that is reasonable. Id. In fact, the incentive is to accept whatever number is proposed to avoid "the sharp thrust of personal liability." Id. at 118, 741 P.2d at 251 (quoting Helme, 153 Ariz. at 137, 735 P.2d at 459). Thus, we find no basis for a presumption of reasonableness to apply to a settlement amount reflected in a Damron/Morris agreement.

¶ 16 Even if we have...