Parking Concepts, Inc. v. Tenney

• Decision Date: 14 January 2004
• Docket Number: No. CV-02-0439-PR.,CV-02-0439-PR.
• Citation: 83 P.3d 19,207 Ariz. 19
• Parties: PARKING CONCEPTS, INC., an Arizona corporation; John K. Tillison; and Lawrence Tantillo, Plaintiffs-Appellees, v. Gary TENNEY and his wife, Dee Tenney; Scott Jackson Brokerage, Inc., an Arizona corporation, Defendants-Appellees, and Gulf Underwriters Insurance Co., a Missouri corporation, Garnishee-Appellant. Gulf Underwriters Insurance Co., a Missouri corporation, Plaintiff-Appellant, v. Parking Concepts, Inc., an Arizona corporation; John K. Tillison; Lawrence Tantillo; Gary Tenney and his wife, Dee Tenney; Scott Jackson Brokerage, Inc., an Arizona corporation; and Core/Jackson, Inc., an Arizona corporation, Defendants-Appellees.
• Court: Arizona Supreme Court

83 P.3d 19

207 Ariz. 19

PARKING CONCEPTS, INC., an Arizona corporation; John K. Tillison; and Lawrence Tantillo, Plaintiffs-Appellees, v. Gary TENNEY and his wife, Dee Tenney; Scott Jackson Brokerage, Inc., an Arizona corporation, Defendants-Appellees, and Gulf Underwriters Insurance Co., a Missouri corporation, Garnishee-Appellant.

Gulf Underwriters Insurance Co., a Missouri corporation, Plaintiff-Appellant, v. Parking Concepts, Inc., an Arizona corporation; John K. Tillison; Lawrence Tantillo; Gary Tenney and his wife, Dee Tenney; Scott Jackson Brokerage, Inc., an Arizona corporation; and Core/Jackson, Inc., an Arizona corporation, Defendants-Appellees.

No. CV-02-0439-PR.

Supreme Court of Arizona, En Banc.

January 14, 2004.

Hopkins & Kreamer, L.L.P. by Joseph C. Kreamer, Stephen M. Hopkins, Phoenix, Attorneys for Parking Concepts, Inc., Tillison, and Tantillo.

Wright & Associates by Lawrence C. Wright, Lee Allen Johnson, Mesa, Attorneys for Tenney and Scott Jackson Brokerage, Inc.

Jardine, Baker, Hickman & Houston by Gerald T. Hickman, Phoenix, Attorneys for Gulf Underwriters Insurance Company.

OPINION

HURWITZ, Justice.

¶ 1 In holding that a judgment stipulated to pursuant to a Morris agreement was reasonable, the superior court in this case relied on the fact that the insureds could have lost their real estate licenses as a consequence of an adverse result in the underlying action. We granted review to decide whether such potential consequences to an insured should be considered in determining the reasonableness of a Morris settlement.

I.

¶ 2 This case arises out of a real estate transaction. Gary Tenney brokered the deal, under which Parking Concepts, Inc. ("PCI") would acquire an airport parking lot. PCI claimed that Tenney misrepresented the tax liability relating to the property, and sued Tenney and his employer, Scott Jackson Brokerage ("SJB"), alleging fraud, negligent misrepresentation, and breach of contract.

¶ 3 SJB and its employees were insured by Gulf Underwriters Insurance Company ("Gulf") under an errors and omissions liability policy with policy limits of $1,000,000. The policy excluded coverage for fraudulent acts. Because PCI's suit alleged fraud, Gulf defended Tenney and SJB under a reservation of rights. After two years of pre-trial proceedings, Tenney and SJB insisted that Gulf either settle the case or withdraw its reservation of rights and defend unconditionally. When Gulf declined to do either, PCI, SJB and Tenney executed a "Morris agreement," under which the defendants stipulated to a judgment and assigned their rights under the Gulf policy to PCI in return for PCI's covenant not to execute the judgment against the insureds. See United Servs. Auto. Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987)

.¹ Under the Morris agreement in this case, Tenney and SJB agreed to a $430,000 judgment in favor of PCI on the negligent misrepresentation claim, of which Tenney would personally pay $35,000. PCI also agreed to dismiss its fraud claims.

¶ 4 PCI then instituted a garnishment proceeding against Gulf, seeking to collect the stipulated judgment. In that proceeding, in addition to various policy defenses, Gulf argued that the Morris agreement was invalid because it was a product of fraud or collusion and because the amount of the stipulated judgment was unreasonable. See id. at 119, 741 P.2d at 252 (holding that Morris agreements must be made "without fraud or collusion"); id. at 120, 741 P.2d at 253 (holding that stipulated settlement is not binding on insurer unless "reasonable").

¶ 5 The superior court granted judgment to PCI. It rejected Gulf's various policy defenses and held that the Morris agreement was neither a product of fraud or collusion nor unreasonable in amount. Although finding the $430,000 stipulated judgment to be "perhaps in the very high end of the range within which a settlement might have been expected to occur," the superior court expressly relied on the testimony of PCI's expert in finding that settlement amount reasonable. That expert had opined that the settlement amount was reasonable in part because Tenney and SJB faced the potential loss of their real estate licenses from an adverse judgment.

¶ 6 Gulf appealed. In a memorandum decision, the court of appeals affirmed both the superior court's findings regarding policy coverage and its finding that the Morris agreement was not a product of fraud or collusion. Parking Concepts, Inc. v. Tenney, 1 CA-CV 00-0129 (Ariz.App. Apr. 15, 2003) (mem.decision). In a separate opinion, the court of appeals vacated the superior court's determination that the stipulated judgment was reasonable in amount. Parking Concepts, Inc. v. Tenney, 203 Ariz. 562, 564 ¶ 10, 58 P.3d 44, 46 (App.2002). The court of appeals so held because it believed that "Tenney and SJB risked losing their licenses only in the event that PCI prevailed on its fraud claim." Id. ¶ 8, 58 P.3d 44. Because the insurance policy excluded coverage for fraudulent acts, the court of appeals concluded that this "potential consequence of a fraud judgment" could not be considered as bearing on the reasonableness of the Morris settlement. Id. ¶ 9, 741 P.2d 246; see id. ¶ 8 ("Insureds may not expand their coverage through stipulated agreements any more than they can stipulate that the underlying conduct was insured rather than uninsured.").

¶ 7 Gulf then petitioned for review of the memorandum decision and PCI petitioned for review of the opinion. We denied Gulf's petition and granted PCI's petition only as to the first issue presented: "Whether the practical effect of an adverse judgment may be considered in evaluating the reasonableness of a Morris agreement settlement." We have jurisdiction pursuant to Article 6, Section 5(3) of the Arizona Constitution, Arizona Revised Statutes ("A.R.S.") § 12-120.24 (2003), and Arizona Rule of Civil Appellate Procedure 23(c)(3).

II.

¶ 8 The opinion below rested on the premise that Tenney and SJB risked losing their licenses only in the event that PCI prevailed on its fraud claim. Parking Concepts, 203 Ariz. at 564 ¶ 8, 58 P.3d at 46. Because fraudulent conduct was not covered by the policy, the court of appeals held that the trial court erred in considering "a consequence against which the policy did not insure." Id. ¶ 9, 58 P.3d 44.

¶ 9 However, Tenney and SJB faced the risk of losing their licenses even as a consequence of negligent conduct. The real estate commissioner may revoke a license if the holder has, in the performance of his brokerage activities, "[p]ursued a course of misrepresentation or made false promises." A.R.S. § 32-2153(A)(1) (Supp.2003). The statute does not require that the misrepresentations or false promises be intentional. Id; see also id. § 32-2153(A)(22) (providing that the commissioner may revoke a license for "demonstrated negligence"). Moreover, as PCI's expert testified, if the real estate recovery fund were utilized to satisfy a negligent misrepresentation judgment against Tenney or SJB, the brokers' licenses would be automatically terminated until the fund was repaid and the judgment satisfied in full. See id. § 32-2188(1) (Supp.2003).²

¶ 10 The superior court found that Tenney's acts were at most negligent; the memorandum decision of the court of appeals affirmed that finding, and we denied review. Because the relevant statutes provide that a possible consequence of that negligent conduct was the revocation of the licenses held by Tenney and SJB, we are therefore required to consider the issue that the court of appeals did not reach—whether it is proper to consider collateral consequences flowing from insured conduct in evaluating Morris agreements for reasonableness.

III.

¶ 11 The starting point is our opinion in Morris. In Morris, adopting the approach of Miller v. Shugart, 316 N.W.2d 729 (Minn.1982), we held that an insured defended under a reservation of rights may enter into a settlement with a claimant without breaching the cooperation clause of the insurance policy. Morris, 154 Ariz. at 119-20,741 P.2d at 252-53. The insured in Morris stipulated to a monetary judgment and assigned his rights against the insurer to the claimant, who in return covenanted to collect the judgment solely from the insurer. Id. at 115, 741 P.2d at 248.

¶ 12 Our decision in Morris recognized that the insurer and insured have valid "conflicting interests" when a defense is offered with a reservation of rights. Id. at 117, 741 P.2d at 250. On the one hand, it is clear that an insurer with a good faith potential coverage defense may appropriately perform its contractual duty to defend while simultaneously reserving the right to later assert the defense. See, e.g., Farmers Ins. Co. of Ariz. v. Vagnozzi, 138 Ariz. 443, 675 P.2d 703 (1983)

; Morris, 154 Ariz. at 118,

741 P.2d at 251 (citing Vagnozzi and holding that the insurer "properly reserved its rights to later assert the policy's intentional act exclusion"). But even though the insurer breaches no contractual duties by a proper reservation of rights, as a practical matter such a course of action places an insured in a "precarious position." Morris, 154 Ariz. at 118,

741 P.2d at 251. The insured not only faces the potential of a judgment in excess of policy limits; even a judgment within policy limits may turn out, after litigation of the insurer's defenses, not to be covered under the policy. Id.

¶ 13 Morris attempted to reconcile these conflicting interests. In order to allow the insured to protect himself from "the sharp thrust of personal liability," id., we held that the cooperation clause of the insurance contract did not prohibit settlements between the insured and the claimant when the insurer defends under a reservation of rights. Id. at 119, 741 P.2d at 252. To protect the insurer, we held that a Morris agreement must be preceded by appropriate notice to the insurer; if the insurer then removes its reservation of rights and ...