No. 93-416
IN THE SUPREME COURT OF THE STATE OF MONTANA
HAINES PIPELINE CONSTRUCTION, INC.
-v-
MONTANA POWER COMPANY.
APPEAL FROM: District Court of the Second Judicial District,
In and for the County of Silver Bow,
The Honorable James E. Purcell, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Randy J. Cox & Sam E. Haddon, Boone, Karlberg &
Haddon, Missoula, Montana
For Respondent:
Bruce R. Toole & Donald L. Harris, Crowley, Haughey,
Hanson, Toole & Dietrich, Billings, Montana
Submitted on Briefs: April 7, 1994
Decided: June 20, 1994
Filed:
Justice James C. Nelson delivered the opinion of the Court.
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 ~udicial
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
2
s p r i n g s 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 atplan demonstrate fitness for service"
to
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 ~nstitute(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
directorsr concerns about the pipeline. The memorandum indicated
that MPC would 81move ~aines off the jobw 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, ~aines a "good faith gesture" extended
as
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
concludedthatthe costs of repairing the welds would substantially
exceed the value of the letter of credit. On Tuesday, May 14,
Gannon and Burke met with MPC1s 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 Hainesl 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 11) , MPC substituted
Judge Olson, the District Court judge w h o 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 11,
denied the motion and stated in its memorandum that:
It is noted that Judge Thomas OLson8s Findings and
Conclusions were based upon evidence produced in support
of the Second Amended Complaint. The District Court
found f o r Plaintiff and the Supreme Court affirmed there
was a Breach of the Covenant of Good Faith and Fair
~ealingand consequently a Breach of the Contract. The
Ð in dings 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 i s
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. m, 833 P.2d at 151.
7
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
(l984), 207 Mont. 409, 413, 673 P.2d 1277, 1279; In re Marriage of
Stout (1985), 216 Mont. 342, 349-50, 701 P.2d 729, 733-34; Anderson
v. State (1991), 250 Mont. 18, 21, 817 P.2d 699, 701. The three
prongs are:
1. Was the issue decided in the prior
adjudication identical with the one presented
in the action in question?
2. Was there a final judgment on the merits?
3. Was the party against whom the plea is
asserted a party or in privity with a party to
the prior adjudication?
w, 673 P.2d at 1279.
In determining whether collateral estoppel applies, satisfying
the first prong of the test is the most crucial. State v. Young
(1993), 259 Mont. 371, 377, 856 P.2d 961, 965, citing Anderson v.
State (1991), 250 Mont. 18, 21, 817 P.2d 699, 702. To meet this
part, "the identical issue or 'precise question' must have been
litigated in the prior action." m, 856 P.2d at 965.
MPC contends that the first prong of the test is not satisfied
because the claim for breach of the implied covenant is not the
same issue as claims for fraud and constructive fraud. Because
fraud and constructive fraud were never considered in the
proceedings in Haines I, MPC concludes that the findings from
Haines I which were affirmed by this Court are irrelevant. We
disagree and conclude that the first prong of the three part test
is met in this case.
The term "issue" does not equate with the elements of a cause
of action. This Court has previously declared that "[tlhe bar that
arises from collateral estoppel extends to all questions essential
to the judgment and actively determined by a prior valid judgment."
Brault v. Smith (1984), 209 Mont. 21, 26, 679 P.2d 236, 238.
Collateral estoppel also prevents relitigation of determinative
facts which were actually or necessarily decided in a prior action.
w, 833 P.2d at 151. In addressing whether a change in legal
theory precludes the collateral estoppel bar, Moore's Federal
Practice states:
A new contention is not, however, necessarily a new
issue. If a new legal theory or factual assertion put
forward in the second action is "related to the subject-
matter and relevant to the is~ues*~ that were litigated
and adjudicated previously, "so that it could have been
raised, the judgment is conclusive on it despite the fact
that it was not in fact expressly pleaded or otherwise
urged." (Citations omitted.)
Vol. lB, Moore's Federal Practice 9 0.443[2], at 760.
In this case Haines originally pled breach of the covenant of
good faith and fair dealing to recover punitive damages. As a
result of our remand order Haines amended its pleadings to allege
fraud and constructive fraud. Although the legal theory relied
upon was different, this change did not result in a change in the
facts and law established in Haines I. Therefore, the precise
issue that MPC is collaterally estopped from relitigating is as
found by Judge Olson, the willful conduct of MPC in enticing Haines
into renewing the letter of credit when in fact, all MPC was trying
to do was gain time to be in a position to draw on the letter of
9
credit.
Moreover, because this Court affirmed the findings and
conclusions of the District Court regarding MPCJs actions
surrounding the extension of the letter of credit, we also conclude
that there was a final judgment on the merits as to that issue and
that the second prong of the test is thus satisfied. Finally, the
third prong is clearly satisfied as Haines advanced its claims
against MPC in Haines I and 11. In light of our holding in Haines
I, MPC is collaterally estopped from arguing that it did not
mislead Haines into extending the letter of credit.
11. LAW OF THE CASE
The law of the case doctrine also precludes relitigation of
the facts and conclusions issued by the District Court in Haines I
which we affirmed on appeal. The rule of law of the case provides
that in deciding a case upon appeal, when the Supreme Court statfr.
in its opinion a principle or rule of law necessary to the
decision, such pronouncement becomes the law of the case, and must
be adhered to throughout its subsequent proceedings, both in the
trial court and upon subsequent appeal. Zavarelli v. Might (1989),
239 Mont. 120, 124, 779 P.2d 489, 492.
The plaintiff in Zavarelli, originally brought an action
attempting to enjoin his sister from destroying or interfering w t .
i:
a sewer system. Zavarelli v. Miqht (l988), 230 Mont. 288, 749 P.23
524. The district court in the first proceeding found that part o
:
the septic system serving the plaintiff's apartment complex
intruded onto the defendant's property, but that the plaintiff had
a prescriptive easement over the defendant's land. Zavarelli, 749
P.2d at 526. On appeal we reversed and remanded the district
court's decision finding that a prescriptive easement could not be
supported. Zavarelli, 749 P.2d at 527. On remand, the district
court made no further findings of fact, but did make additional
conclusions of law that as a result of mutual mistake in the
boundary line the plaintiff did have a property right in the land
where the septic tank was located. Zavarelli, 779 P.2d at 492.
The defendant appealed alleging that the district court erred in
allowing a new affirmative defense of mutual mistake. Zavarelli,
779 P.2d at 492.
This Court determined that although the doctrine of law of the
case precluded the district court on remand from determining as a
matter of law that the plaintiff had a prescriptive easement in the
defendant's property, it did not, preclude the district court from
reaching a different conclusion of law based on the facts which it
had already found. Zavarelli, 779 P.2d at 493. (Emphasis added.)
When a case is reversed and remanded for further proceedings,
the issues are generally open on a retrial. Zavarelli, 779 P.2d at
493. However the trial court is not free to ignore the mandate and
opinion of the reviewing court, but must proceed in conformity with
the views expressed by the appellate court. Zavarelli, 779 P.2d at
493.
On remand, the trial court may consider or decide any
matters left open by the appellate court, and is free to
make any order or direction in further progress of the
case, not inconsistent with the decision of the armellate
court, as to any question not presented or settled by
such decision. (Emphasis added.)
zavarelli, 779 P.2d at 493.
In Haines I, we affirmed Judge Olson's findings and
conclusions in all respects except as to the matter of the award of
$50,000 compensatory damages (Haines I -- issue 111) and except as
to the court's leqal conclusion, based on pre-storv law, that a
breach of the covenant of good faith and fair dealing was a
sufficient basis on which to award punitive damages (Haines I --
issue IV) .
We did not disagree with or reverse Judge Olson's findings of
fact on which he awarded punitive damages. In fact, we concluded
that the issues of fraud and the breach of the covenant of good
faith and fair dealing as applied in this case to be "inextricably
intertwined." Haines, 830 P.2d at 1240. We simply held that
between the time the parties litigated through the trial and the
time the case was ready for decision on appeal, we changed the law,
and that on the basis of the changed law, punitive damages could
not be awarded on the basis of the then existing record, without
more. Our singular purpose on remand was to allow the parties to
plead, prove, argue and defend against the "without more," that is,
to: 1) allow Haines to amend its pleadings to allege the necessary
legal basis (fraud, constructive fraud, or other theory) to prove
punitive damages under Storv; 2) to allow MPC to amend its
pleadings to assert fraud, constructive fraud, or other punitive
damages defenses; and, 3) to allow the district court to determine
whether Judge Olson's findings and conclusions, alone or with
additional evidence on the new theories justified an award of
punitive damages.
We did not reverse and remand for a whole new or de novo
trial. To the contrary, under the posture of the case on the
limited remand ordered, once the parties amended their pleadings,
the District Court was limited: 1) to determining, on the basis of
Judge Olson's findings and conclusions, whether punitive damages
were justified on the basis of any new theory plead (i.e. , was
Haines entitled to summary judgment simply on the basis of Judge
Olson's findings and conclusions); 2) if not, to accepting
additional evidence in support of and against the new lesal
theories wled, and to making additional findings on the additional
evidence as regards the new legal theories; 3) to making additional
conclusions of law on whether Judge Olson's findings, along with
the new findings, justified an award of punitive damages under the
new leaal theories pled; and, 4) if punitive damages were
justified, to determining the amount thereof.
In Story v. City of Bozeman (1993), 259 Mont 207, 230-31, 856
P.2d 202, 216 (Story 11) , we differentiated between a case where we
remand for a new trial without saving certain portions of the
judgment (i.e. a trial de novo) and a case where we remand with
limiting instructions. Our remand in Haines I was of the latter
type and not the former. It was error for the District Court in
Haines I1 to disregard Judge Olson's findings and conclusions from
Haines I concerning the breach of the covenant of good faith and
fair dealing which we affirmed on appeal.
The findings and conclusions in Haines I that MPC misled
Haines into extending the letter of credit, that MPC's conduct was
oppressive and constituted implied malice, and that MPC breached.
the covenant of good faith and fair dealing, all stand as the law
of the case, and the District Court was in error to disregard and
contravene those in Haines 11.
On remand, the District Court must consider the claim for
punitive damages based on the new theories pled and on any
additional evidence received in Haines 11; it is not, however, at
liberty to disregard or contravene Judge Olson's findings and
conclusions in reaching its decision.
REVERSED and REMANDED for
this opinion.
We Concur:
Justice Karla M. Gray did not participate in this opinion.