Redding v. Prosight Specialty Mgmt. Co.

Decision Date27 February 2015
Docket NumberNo. CV 12–98–H–CCL.,CV 12–98–H–CCL.
Citation90 F.Supp.3d 1109
PartiesBillie L. REDDING, Plaintiff, v. PROSIGHT SPECIALTY MANAGEMENT COMPANY, INC. aka Mutual Marine Office, Inc., ProSight Specialty Insurance Group, Inc. aka Nymagic, Inc., and New York Marine and General Insurance Company, Defendants.
CourtU.S. District Court — District of Montana

Annie Harris, Gregory C. Black, Robert M. Carlson, Corette Black Carlson & Mickelson, Butte, MT, G. Patrick Hagestad, Milodragovich Dale Steinbrenner, Missoula, MT, for Plaintiff.

Gary M. Zadick, Ugrin Alexander Zadick & Higgins, Great Falls, MT, Mark C. Goodman, Michelle P. Alborzfar, Hogan Lovells U.S. LLP, San Francisco, CA, Robert S. Bennett, Hogan Lovells U.S. LLP, Washington, DC, for Defendants.


CHARLES C. LOVELL, Senior District Judge.

Summary of Case

[Insurer delivered policy limits of $4 million to Linda Deola, attorney for Plaintiff Redding, and six other plaintiffs to settle prior case against accounting firm Anderson ZurMuehlen. Redding alone by Deola as counsel now sues insurer for bad faith failure to timely settle prior case. Plaintiff is unable to explain her claim in deposition. Deola is disqualified as counsel here so she could testify as a necessary witness to facts in the prior case. Co-counsel, partner Brian Miller, takes over case. Onerous discovery violations and other bad faith by Plaintiff's counsel. Attempted disqualification of judge is denied. Held: Summary judgment for insurer with award of attorney fees and costs against counsel Deola and Miller.]

This is an unusual third-party bad faith insurance case. It is best understood divided into three distinct phases or segments of litigation, and the Court sets forth at some length and in some detail this extraordinary background before addressing multiple pending motions.

First Phase—Underlying Tort Litigation

The first phase began with Plaintiff Billie Redding's 2009 tort claim against the Anderson ZurMuehlen & Co., P.C. (“AZ”) accounting firm. Plaintiff Redding was a long-time client of AZ, receiving traditional accounting services and tax advice. AZ had created a subsidiary called “AZ Real Estate & Business Brokerage,” doing business as “Acquiron, LLC.” In 2004, Plaintiff Redding wanted to dispose of her substantial ranch and replace it with a stream of income, but she would be faced with approximately $1.5 million in income taxes. Her AZ accountant referred her to Acquiron for a possible I.R.C. § 1031 property exchange that would allow her to avoid this tax penalty. Acquiron advised her to consider a § 1031 exchange of her ranch for tenancy-in-common shares (“TICs”) of commercial properties sold by DBSI. The Internal Revenue Service had approved DBSI TICs as a suitable vehicle for § 1031 exchanges. In addition to avoiding taxes, Redding was to receive payments of $13,000 per month increasing over a ten year period to $22,000 per month. With the advice of her personal attorney, Redding decided to participate in this transaction. Unfortunately, four years later DBSI declared bankruptcy, and Redding's monthly payments became irregular and eventually stopped.

Acquiron also recommended the same or a similar transaction for at least six other substantial ranch clients, who likewise each suffered the loss of their monthly rental payments in 2008 or 2009. On November 11, 2008, the day after DBSI declared bankruptcy, AZ reported to its insurer, New York Marine and General Insurance Co. (NYM), that there was a potential for multiple claims made against AZ and Acquiron by their clients. Redding filed suit in state court against AZ, Acquiron, her AZ accountant, and two Acquiron employees in 2009. The other six claimants filed suit against AZ and the others in 2010, 2011, and 2012. Although one suit was filed in 2010, it was not served on AZ until late 2011. Redding alleged in her complaint that her TICs were actually unregistered securities and that AZ and Acquiron and their employees had violated the Securities Act of Montana, MCA §§ 30–10–101 et seq., and had committed fraud and misrepresentation in connection with the sale of the TICs as unregistered securities. The applicable insurance policy (discussed below) contained an exclusion for claims arising from the brokerage of unregistered securities.

In January, 2011, discovery was ongoing in Redding's case, and AZ's defense lawyers were planning and preparing summary judgment motions as to whether the statute of limitations had expired for the securities claim and whether the TICs were securities. AZ's defense lawyers also believed that Redding's $4.6 million in claimed damages were inflated by the fact that she had not reported all of her previously received rental income from her TICs and the fact that she claimed over $2 million in damages from non-recourse mortgage debt that she had acquired in the transaction but that (allegedly) she would never be required to repay.

On February 17, 2011, before a summary judgment motion had been filed, Redding made a demand for the $2 million policy limit applicable to her claim. At that time, a March 23rd mediation conference was already scheduled. Defendants responded to the policy limit demand by requesting that the 30–day response period be extended a few days to include the day of the mediation conference. Defendants also explained that they had not yet received an expert's report as to damages and were waiting for more information to evaluate Plaintiff's damages. Plaintiff rejected Defendant's request for an extension, and the 30–day demand expired.

The March 23, 2011, mediation conference was held as scheduled, and Stuart Kellner served as the mediator. Defendants opened with an offer of $250,000, hoping to arrive at a final settlement of somewhere between $750,000 and $900,000. Redding counter-offered with $6.5 million, which was more than three times the policy limit. Mediator Kellner decided that the mediation would not be successful that day, so he terminated the mediation.

In August 2011, a state district court ruled on AZ's summary judgment motion as to the securities issue, ruling in AZ's favor that Redding's DBSI TICs were not securities. In response, Redding filed a petition for writ of supervisory control in the Montana Supreme Court, which heard oral argument in late April, 2012, and ruled on July 5, 2012. The Montana Supreme Court held that the DBSI TICs were securities and remanded the case to the district court for further proceedings.

However, in June 2012, before the Montana Supreme Court had even issued its decision on July 5, Redding and the six other claimants settled their lawsuits against AZ in a global settlement for $4.65 million. NYM contributed $4 million to the settlement from AZ's 2008 and 2010 policies, and AZ contributed $650,000 (which represented AZ's commissions or fees). Redding's share of the global settlement (after payment of her attorney fees and costs) was $450,844.87.

AZ was represented in the Underlying Litigation by a Montana law firm, Milodragovich, Dale, Steinbrenner & Nygren, P.C. (“MDS”), and specifically by two MDS attorneys, G. Patrick HagEstad and Brad Condra. Plaintiff Redding was represented by Richard “Mike” Layne of Portland, Oregon, and Linda Deola, of Helena, Montana. After filing Redding's complaint in 2009, Deola subsequently acquired the five other clients and, as sole counsel for each, served their complaints in 2011 and 2012.1 The seventh claimant, Garrison Ranches Inc., was represented by John Bloomquist.

The record in this case does not reflect that Redding gave informed consent to the multiple representations of Ms. Deola's five other clients. Redding later testified in her deposition that she did not find out that the other claimants existed until the insurance money was divided. (Doc. 259–14, Redding Depo. 65:14–17; 75:18–25.) It is not clear even now that Redding understands that Deola was retained by those other claimants for the purpose of sharing the same limited insurance proceeds that Redding was hoping would be hers alone. Redding was surprised at the time of settlement when she found out that other people were involved. (Doc. 259–14, Redding Depo. 94:18–95:17.) She testified that, at first, she didn't realize that the $4.65 million was for everybody; she hoped that sum would be used to compensate her alone. (Doc. 259–14, Redding Depo. 96:2–10.) Even at the time of her deposition in this case, Redding seemed not to understand that she and all of Deola's other clients were sharing one finite pot of insurance money. (Doc. 259–14, Redding Depo. 67:11–21.) Instead, Redding believes that she is now suing NYM because it has not yet paid her bill in full. (Doc. 259–14, Redding Depo. 148:3–10 (“You [NYM] are not paying your bills.... My bill.... See, it keeps adding up. It is drawing interest.”).)

In other words, Redding's contention seems to have been that she was in competition with Deola's other five clients for their respective shares of an inadequate sum certain.

Ms. Redding's testimony has caused concern about compliance with the rules regarding representation of multiple clients. Rule 1.7, Montana Rules of Professional Conduct, requires a lawyer to refrain from taking on a new representation when “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client....” Rule 1.7(a)(2), Mont. R. Prof. Conduct. Such multiple-client representations may go forward if four conditions can be met, including the condition that “each affected client gives informed consent, confirmed in writing.” Rule 1.7(b)(4), Mont. R. Prof. Conduct. The entire record does not demonstrate that this condition was met.

Second Phase—Underlying Coverage Litigation

After Redding's complaint was filed in 2009, NYM agreed to defend AZ against Redding's claim, but under a reservation of its right to deny coverage based on exclusions under the policy. The 2008 policy pertinent to...

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