Minn. Stat. § 480A.08, subd. 3 (1996).
STATE OF MINNESOTA
IN COURT OF APPEALS
and the City of Two Harbors,
Rust Environment and Infrastructure, Inc.,
GME Consultants, Inc.,
Lake County District Court
File No. C7-95-257
Larry M. Nord, Orman & Nord, 1301 Miller Trunk Highway, Suite 400, Duluth, MN 55811 (for respondents Rice Lake Contracting Corp. and City of Two Harbors)
Robert J. Huber, Leonard, Street and Deinard, P.A., 150 South Fifth Street, Suite 2300, Minneapolis, MN 55402 (for appellant Rust Environment and Infrastructure, Inc.)
Jeffrey W. Coleman, Coleman Hull & Van Vliet, 8500 Normandale Lake Boulevard, Minneapolis, MN 55437 (for respondent GME Consultants, Inc.)
*Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. art. VI, § 10.
Considered and decided by Huspeni, Presiding Judge, Schumacher, Judge, and Mansur, Judge.
Respondents Rice Lake Contracting Corp. (Rice Lake) and City of Two Harbors (Two Harbors) entered into a settlement agreement. Rice Lake and Two Harbors moved for declaratory judgment to determine the legal effect of the settlement agreement on Two Harbors' third-party indemnity claims against appellant Rust Environment and Infrastructure, Inc. (Rust) and respondent GME Consultants, Inc. (GME). All parties filed cross-motions for partial summary judgment. The trial court issued an order granting Two Harbors' and Rice Lake's partial summary judgment motion and denying Rust's motion. We affirm.
The City of Two Harbors contracted with Rice Lake to improve the City of Two Harbors' sewage treatment plant. Two Harbors hired Rust and GME as consulting engineers on the project. Rice Lake sued Two Harbors for breach of contract, claiming Two Harbors owed Rice Lake $2,166,750 above their estimated price in connection with the sewage plant project. Two Harbors filed a third-party complaint against Rust and GME. The underlying lawsuit between Rice Lake, Two Harbors, and Rust and GME remains pending.
Attempting to simplify the lawsuit, Rice Lake and Two Harbors entered into a settlement agreement that compromised the amount Two Harbors owed Rice Lake under the original construction contract, agreeing to a figure of $1,785,402. Further, they agreed that Two Harbors would pay Rice Lake $200,000 immediately, and would give Rice Lake a promissory note for the balance payable only out of the proceeds from Two Harbors' legal claims against Rust and GME. Finally, Rice Lake agreed it would fund Two Harbors' suit against Rust and GME and to exercise full control over the prosecution of the case.
Two Harbors and Rice Lake were reluctant to activate the settlement agreement without knowing whether that agreement might operate in some way to extinguish Two Harbors' claims against Rust and GME. Two Harbors and Rice Lake conditioned the agreement upon a declaratory judgment establishing the settlement agreement's legal effect with respect to Two Harbors' claims against Rust and GME. By its terms, the settlement agreement is contingent upon a judgment declaring that the settlement agreement does not extinguish Two Harbors' third-party claim against Rust and GME:
Upon execution of this Settlement Agreement, Rice Lake shall prepare, for joint submission by Rice Lake and Two Harbors, a declaratory judgment action seeking a declaration by the Court that the Settlement Agreement does not, as a matter of law, extinguish, bar or prohibit Two Harbors' claims against Rust and GME. If the court rules that the Settlement Agreement does extinguish, bar or prohibit Two Harbors' claims, and Rice Lake is unable to obtain immediate and final appellate review reversing the court then the parties shall be returned to the status quo as if this Agreement had not been entered into. If the court rules as a matter of law that the Settlement Agreement does not extinguish, bar or prohibit Two Harbors' claims against Rust and GME then this Settlement Agreement shall be fully effective and not subject to any other condition.
Pursuant to the execution of the settlement agreement, Rice Lake and Two Harbors brought the underlying declaratory judgment action. All parties filed cross-motions for partial summary judgment. Rice Lake and Two Harbors asked the trial court to hold that the settlement agreement did not "as a matter of law" extinguish, bar or prohibit Two Harbors' third-party indemnity claims against Rust and GME. They asked whether Two Harbors' claim was extinguished, as a matter of law, by the "mere fact" of the settlement agreement. In addition, each of the parties acknowledged that there were significant fact issues precluding summary judgment on their entire claim for relief.
Rust asked the court to hold that Two Harbors' indemnity claims are limited to the $200,000 that Two Harbors actually paid. Rust asked the trial court to follow the common-law rule that indemnity may be sought only for amounts which have actually been paid or for which the indemnitee has become unconditionally liable. In other words, Rust asserts that for indemnity purposes the conditional promissory note for $1,585,000 was not payment.
On February 28, 1997, the trial court issued an order granting partial summary judgment in favor of Rice Lake and Two Harbors and denying Rust's motion. The trial court ruled that fact issues prevented summary judgment on the entire claim, noting that there are two issues "not yet capable of resolution by virtue of the significant factual disputes existing in relation thereto." Those issues, according to the trial court, were whether Rust and GME committed professional negligence and whether the settlement amount is reasonable.
Rice Lake and Two Harbors moved the trial court to enter final partial judgment under Minn. R. Civ. P. 54.02. Again, they acknowledged fact issues preventing judgment on their entire claim for relief. Rust opposed the motion on the ground that final partial judgment was improper because the trial court's order did not dispose of a complete "claim," as required by rule 54.02, but only disposed of some of the issues involved in the claim. On June 5, 1997, again noting "various disputed fact issues," the trial court granted the motion and ordered the entry of final partial judgment. Rust appealed the trial court's order. This court found the partial judgment was appropriate and ordered the parties to proceed with the appeal of the partial summary judgment.
"On an appeal from summary judgment, we ask two questions: (1) whether there are any genuine issues of material fact and (2) whether the lower courts erred in their application of the law." State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990). "The reviewing court must view the evidence in the light most favorable to the party against whom judgment was granted." Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn. 1993). However, where the material facts are not in dispute, a reviewing court need not defer to the trial court's application of the law. Hubred v. Control Data Corp., 442 N.W.2d 308, 310 (Minn. 1989).
The trial court concluded in the partial summary judgment that partial settlement through the agreement in this case simplified the lawsuit, removing from trial a dimension of the parties' disputes. The trial court determined that approval of this agreement was consistent with this court's order dated May 28, 1996. See Rice Lake Contracting Corp. v. Rust Envtl. & Infrastructure, Inc., 549 N.W.2d 96, 100 (Minn. App. 1996). In granting partial summary judgment, the trial court was determining a purely legal issue, specifically the legal effect of the settlement agreement on the parties involved. The trial court specifically stated there were factual disputes to be later determined in the underlying lawsuit, thus precluding a complete judgment.
Rust claims the trial court erred as a matter of law in granting partial summary judgment in favor of Two Harbors and Rice Lake. Rust argues the settlement agreement bars, prohibits or extinguishes Two Harbors' third-party indemnity claims against Rust and GME because the settlement agreement is (1) not a permissible Miller-Shugart agreement; (2) is an unenforceable Mary Carter agreement; and (3) is collusive and unreasonable as a matter of law. Rust further contends that if the settlement agreement is not collusive or unreasonable as a matter of law, Two Harbors' third-party claim against Rust is limited to the $200,000 actually paid by Two Harbors to Rice Lake because the conditional promissory note is not payment for indemnity purposes.
Rust argues the trial court erred as a matter of law in upholding the claim of Two Harbors and Rice Lake because the settlement agreement did not bar, prohibit or extinguish Two Harbors' third-party indemnity claims. Rust contends the trial court relied on "the philosophy and rationales set forth in the series of cases going back to Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982)," and as a result the trial court was extending Miller v. Shugart beyond the insurance context and into non-insurance cases in which the third party does not have a contractual duty to defend and indemnify. Rust argues such an extension is contrary to this court's recent caution that "[a] Miller-Shugart settlement is a narrowly crafted remedy that protects an insured against a plaintiff's claim" and that any extension of the doctrine should be left to the supreme court. Burbach v. Armstrong Rigging & Erecting, Inc., 560 N.W.2d 107, 110 (Minn. App. 1997). Rust's argument is without merit. The trial court was basically adopting the rationales put forth by Rice Lake in its memorandum and opined that "Minnesota law, which all agree is limited, is in fact consistent with a position contrary to Rust's position." Mere referencing of prior Minnesota case law with rationales similar to Rice Lake's does not constitute an extension of the Miller-Shugart doctrine.
Two Harbors and Rice Lake assert in their memorandum that because there is not an insurance contract or other liability agreement between Two Harbors and Rust there are no issues about extending Miller-Shugart agreements to the present case or construing this settlement agreement as a Miller-Shugart agreement.
Based on this court's position that any extension of the Miller-Shugart doctrine should be made by the supreme court, this settlement agreement should not be construed as such.
(2) Mary Carter
Rust further alleges the settlement agreement has the characteristics of an impermissible Mary Carter agreement. The Minnesota Supreme Court described a Mary Carter settlement as:
The term arises from the agreement popularized by the case of Booth v. Mary Carter Paint Co., Fla. App. 1967, 202 So. 2d 8, and now appears to be used rather generally to apply to any agreement between the plaintiff and some (but less than all) defendants whereby the parties place limitations on the financial responsibility of the agreeing defendants, the amount of which is variable and usually in some inverse ratio to the amount of recovery which the plaintiff is able to make against the nonagreeing defendant or defendants.
Other essential provisions which earmark a Mary Carter agreement are that the fact that the agreement has been entered into and its terms are kept secret from both the nonagreeing parties and the court, that the defendants remain in the lawsuit as defendants, and that the plaintiff is guaranteed some minimum recovery. The collusive nature of such agreements and the fraud they tend to work upon both the nonagreeing parties and the courts have been severely criticized.
Pacific Indem. Co. v. Thompson-Yaeger, Inc., 260 N.W.2d 548, 556 (Minn. 1977).
In Pacific Indemnity, the Minnesota Supreme Court considered a settlement agreement which had certain "Mary Carter" features because of a "limitation-of-liability provision" and a "provision for varying the amount the agreeing defendants will pay." Id. However, the settlement agreement in Pacific Indem. did not implicate "[t]he most objectionable aspects [of a Mary Carter agreement], secrecy and collusion." Id. "Unlike a true Mary Carter agreement, the Settlement agreement here was fully disclosed to the court and nonagreeing parties." Id. The Pacific Indem. court concluded that any harmful effect of a "Mary Carter" agreement on party adversity is fully cured by "disclosure and an adequate opportunity to cross-examine" the settling defendant. Id. at 557. The court held that where (a) no secrecy surrounded the agreement, (b) no prejudice occurred to the rights of the non-settling parties, and (c) an opportunity existed for argument to the jury of the effect of the release, such an agreement was not objectionable. Id. at 558.
Applying that standard to the present settlement agreement, not all the criteria of an impermissible Mary Carter agreement are met. For instance, there was no secrecy in the settlement agreement. Additionally, Rust is not prejudiced by the settlement agreement. In fact, if Rust is correct in its argument about limitation of the amount of liability, Rust is benefited by the settlement agreement because damages are capped.
(3) Collusive and Unreasonable
Rust further asserts that the settlement agreement is collusive and unreasonable as a matter of law. Two Harbors and Rice Lake claim these arguments are contested fact issues to be resolved in the underlying lawsuit, and as such are beyond the scope of this appeal.
In its order granting partial summary judgment, the trial judge concluded that one of the central issues not yet capable of resolution was whether the terms of the settlement agreement between Two Harbors and Rice Lake were reasonable given the significant factual disputes indicating that damages may be as low as $100,000 or as high as $1.5 to $2.2 million.
The determination of whether the settlement agreement is collusive and unreasonable is better left to the trial court when trying the underlying lawsuit on the merits.
Two Harbors and Rice Lake argue that in this declaratory judgment action they are not asserting that Rust is "bound" by the settlement agreement, rather the narrow issue is whether the settlement agreement as a matter of law bars, prohibits, or extinguishes Two Harbors' third-party claims against Rust and GME.
Minnesota law favors settlements because of the opportunity they present to avoid or simplify litigation. Rice Lake, 549 N.W.2d at 100. In addition, a portion of the trial court's rationale for its ruling was based on "the attitude of courts today towards encouraging settlements" and as indicated by the court of appeals, the agreement limits and reduces the issues for trial and, as such, is consistent with a plethora of public policies promoting efficient, economical and expeditious resolution of disputes. Because of this strong public policy favoring settlement agreements and this court's apparent support, the settlement agreement does not bar, prohibit or extinguish Rice Lake's and Two Harbors' third-party claim.
Rust argues that the trial court erroneously held that Minnesota precedent supports Rice Lake's argument that conditional promissory notes can be considered payment for purposes of contribution or indemnity. Rust argues that its obligation to indemnify Two Harbors on the settlement agreement does not include a duty to indemnify Two Harbors for any part of the conditional promissory note of $1,585,402.
In its order granting partial summary judgment, the trial court stated that, given the significant factual dispute as to damages sought by Rice Lake (anywhere from a sum only one-half of the settlement amount to a sum in excess of ten times the settlement amount), it is likely that the reasonableness of the settlement cannot be easily determined until what amount of damages, if any, Rice Lake is entitled to, and indeed what part, if any, of those damages ought to be attributable to either of the two consultants, is determined. Such, however, does not preclude the court from resolving the issues raised by these motions.
Under the common law, the right of indemnity does not accrue until the liability of the party seeking indemnity "has become finally fixed and ascertained, or until after the claimant has settled or has paid the judgment or more than a commensurate share of it."
Metropolitan Property & Cas. Ins. Co. v. Metropolitan Transit Comm'n, 538 N.W.2d 692, 695 (Minn. 1995). Minnesota has adopted this common law rule in the insurance context in several cases. Christy v. Menasha Corp., 297 Minn. 334, 211 N.W.2d 773, 776-77 (1973); Blomgren v. Marshall Management Serv., Inc., 483 N.W.2d 504, 506 (Minn. App. 1992). In Christy, it was held the right of indemnity arises when "payment has been made or loss or damage has otherwise occurred." 211 N.W.2d at 776-77. In Blomgren, this court stated:
[A]ccording to common law rules, an action for contribution or indemnity does not accrue until one tortfeasor, commonly liable with at least one other tortfeasor, pays more than its share of the damage.
483 N.W.2d at 506. However, this court further noted under Minn. R. Civ. P. 14.01, a joint tortfeasor need not wait until it has made the actual payment to bring a contribution or indemnity claim, but may institute a third-party action in conjunction with the original claim. Grothe v. Shaffer, 305 Minn. 17, 232 N.W.2d 227, 232 (1975). When such third-party action is brought, the contribution/indemnity claim is considered contingent upon the outcome of the original action. Id. at 233.
Rice Lake and Two Harbors assert that in Minnesota a defendant does not have to guarantee payment of a promissory note to preserve third-party claims for the full amount of the note. See Walker Mfg. Co. v. Dickerson, Inc., 510 F. Supp. 329, 331 (W.D. N.C. 1980), aff'd per curiam, 660 F.2d 494 (4th Cir. 1981) (citing Minnesota law holding that indemnitee could recover from indemnitor even though indemnitee would never pay indemnified judgment because it was insolvent); Kennedy v. Fidelity & Cas. Co., 100 Minn. 1, 110 N.W. 97 (1907) (rejecting indemnitor's argument that the promissory note was not a "loss" because the maker "might never be called upon to make a payment, might become insolvent, and there is no certainty they will ever be paid"); cf. Miller v. Shugart, 316 N.W.2d 729, 732 (Minn. 1982) (allowing plaintiff to garnish stipulated judgment against defendants' insurer, even though "defendants need not pay anything").
Rice Lake's reliance on Kennedy is misplaced. Kennedy dealt with a contract of indemnity and an unconditional promissory note. Kennedy, 110 N.W. at 98. We have neither in this case.
Because the reasonableness of the settlement agreement is a factual determination for the trial court, the issue of limited liability does not arise unless it is determined that the settlement agreement is reasonable. If in the underlying lawsuit the trial court determines the settlement agreement is unreasonable, the issue becomes moot.
Rust's final argument is that the settlement agreement might deprive Rust and GME of defenses available under Minn. R. Civ. P. 14.01. The rule provides that third-party defendants "shall make any defenses to the third-party plaintiff's claim as provided in Rule 12" and "may assert against the plaintiff any defenses which the third-party plaintiff has to the plaintiff's claim." Minn. R. Civ. P. 14.01. Rule 14.01 creates procedural rights but does not address substantive claims or defenses. There is nothing in the rule that authorizes settling parties to affect the substantive rights of nonsettling parties.
Absent an agreement to the contrary, Rust and GME continue to have all defenses available under this rule.