NO. 95-389
IN THE SUPREME COURT OF THE STATE OF MONTANA
1996
STATE OF MONTANA, ex rel. STATE
COMPENSATION MUTUAL INSURANCE FUND,
Plaintiff and Respondent/Cross-Appellant,
v. !f jT;mg
GEORGE BERG, d/h/a BERG LUMBER CO., J2.i :,
L-.ar ,_ ,/~ ,~_;
and BERG LUMBER, INC., a+?!< 0;' c.3 .,,.
-t,r~i:,.::,,: .::k
Justice Karla M. Gray delivered the Opinion of the Court.
George Berg, d/b/a Berg Lumber Co. and Berg Lumber, Inc.
(Berg) appeals from the denial by the Tenth Judicial District
Court, Fergus County, of his motions for a new trial and to vacate
the judgment and enter judgment in his favor. The State of
Montana, ex rel. State Compensation Mutual Insurance Fund (State
Fund), cross-appeals from the judgment entered by the District
Court and, in particular, from its order denying the State Fund's
motion for a directed verdict. We affirm on the appeal, reverse on
the cross-appeal and remand.
We restate the issues on appeal and cross-appeal as follows:
1. Did the District Court abuse its discretion in denying
Berg's motion for a new trial which was based on juror misconduct?
2. Did the District Court abuse its discretion in denying
Berg's motion for a new trial which was based on failure to
instruct the jury on the definition of "misrepresent?"
3. Did the District Court abuse its discretion in denying
Berg's motion to vacate the judgment and enter judgment in his
favor which was based on the State Fund's failure to plead
constructive fraud with sufficient particularity?
4. Did the District Court abuse its discretion in denying
Berg's motion to vacate the judgment and enter judgment in his
favor which was based on a statute of limitations bar to the
constructive fraud claim?
5. Did the District Court err in denying the State Fund's
motion for a directed verdict which was based on the existence of
a disputable presumption of employee status?
FACTUAL AND PROCEDURAL BACKGROUND
Berg owns and operates a lumberyard, sawmill and planing
operation in Lewistown, Montana. Montana law requires him to
provide workers' compensation insurance and unemployment insurance
for his employees. Berg's workers' compensation insurance through
the State Fund authorized the State Fund to examine and audit
Berg's payroll records, general ledger, disbursements, vouchers,
contracts, tax reports and all other books, documents and records
at any reasonable time.
In February of 1989, the Unemployment Insurance Division of
the Montana Department of Labor and Industry (Department) requested
an audit of Berg's operations as a result of an unemployment
insurance benefits claim filed by Tim Murnion (Murnion). Murnion
claimed to have been employed by Berg, but no wage credits based on
employment by Berg were on file with the Unemployment Insurance
Division. Mike Knecht (Knecht), a Department field representative,
was assigned to conduct an unemployment insurance audit of Berg's
operations for the January 1, 1987, through December 31, 1988,
period and a workers' compensation audit of those operations for
the July 1, 1987, through September 30, 1988, period. The workers'
compensation audit period was subsequently extended to December 31,
1988. Between the beginning of Knecht's audit of Berg's operations
on February 22, 1989, and December of 1990, when he conducted a
physical inspection of Berg's operations, Knecht visited the
sawmill six or seven times.
Based on the results of Knecht's audit, the State Fund sued
Berg in Lewis and Clark County on January 17, 1992. It alleged
that Berg did not properly remit workers' compensation insurance
premiums in that he (1) failed to make payments for individuals
improperly treated as independent contractors rather than
3
employees; (2) underreported employees' wages ; and (3)
misclassified employees' wages. Berg moved for a change of venue
to Fergus County and the motion was granted. In March of 1993, the
State Fund moved to amend its complaint to add actual and
constructive fraud claims and the District Court granted the motion
over Berg's objections. Berg answered the amended complaint by
generally denying the State Fund's allegations and asserting the
statute of limitations and estoppel as affirmative defenses. The
parties conducted discovery and filed numerous pretrial motions.
The District Court ruled on the motions and entered a pretrial
order prepared by trial counsel for both parties.
After several trial dates were scheduled and vacated, a jury
trial began on June 27, 1994, in Lewistown, Montana. The State
Fund moved for a mistrial and change of venue, contending that it
could not yet a fair trial in Fergus County. The District Court
declared a mistrial, but denied the State Fund's motion for change
of venue.
The second trial began on June 6, 1995. At the conclusion of
the State Fund's case-in-chief, the District Court granted its
motion for a directed verdict on Berg's liability for workers'
compensation premiums for the first quarter of 1991 in the amount
of $13,333.49. At the end of the trial, the State Fund moved for
a directed verdict on the employee status of certain individuals
Berg claimed were independent contractors. The State Fund argued
that Berg had presented insufficient evidence to rebut the
4
presumption of employee status for the question to go to the jury.
The District Court denied the motion.
The jury ultimately returned a special verdict finding that
Berg committed constructive fraud in dealing with the State Fund
and misrepresented payroll, employee status and employee duties by
misclassifying his employees. The jury awarded $305,857.46 in
damages to the State Fund. The District Court added the $13,333.49
directed verdict amount to the jury's award and entered judgment
for the State Fund for $319,190.95.
Berg obtained new counsel and moved for a new trial and to
vacate the judgment and enter judgment in his favor. He premised
the new trial motion on alleged juror misconduct and instructional
error. His motion to vacate the judgment and enter judgment in his
favor was based on the State Fund's alleged failure to plead
constructive fraud with sufficient particularity and a statute of
limitations bar to the constructive fraud claim. The District
Court denied Berg's motions.
Berg appeals from the denial of his postjudgment motions and
the State Fund cross-appeals from the District Court's denial of
its motion for a directed verdict. Additional facts are provided
below as necessary for our resolution of the issues before us.
DISCUSSION
1. Did the District Court abuse its discretion in
denying Berg's motion for a new trial which was based on
juror misconduct?
Berg contended in his new trial motion that juror misconduct
by juror James Carroll (Carroll) constituted irregularity in the
5
proceedings of the jury. He supported his motion with an affidavit
from juror Robert Flinders (Flinders). According to Flinders,
Carroll said to him, on several occasions during the trial, "That's
it; [tlhat's all I need to hear; [ilt's all over." Flinders also
stated that Carroll pointed to another juror during several
recesses and said, "That's one we'll have to convince." Flinders
either ignored Carroll's statements or told Carroll to be quiet.
In denying Berg's new trial motion, the District Court
concluded that Carroll's conduct was not an external influence on
the jury but was, if anything, an internal influence for which a
juror affidavit could not be used to impeach the verdict. The
court determined, therefore, that Flinders' description of
Carroll's conduct did not provide a basis on which it could grant
a new trial.
We review a district court's denial of a motion for a new
trial to determine whether the district court abused its
discretion. State v. Kelman (Mont. 1996), 915 P.2d 854, 859, 53
St.Rep. 372, 375; State v. Brogan (1995), 272 Mont. 156, 160, 900
P.2d 284, 286. Whether certain conduct is an internal or external
influence on the jury is a question of law, however. See Geiger v.
Sherrodd, Inc. (1993), 262 Mont. 505, 510, 866 P.2d 1106, 1109. We
review a district court's conclusions of law to determine whether
they are correct. Topco, Inc. v. State Dept. of Highways (1996),
275 Mont. 352, 357, 912 P.2d 805, 808.
6
The grounds on which a new trial may be granted are
statutorily defined in Montana. Section 25-11-102, MCA, provides
in relevant part:
The former verdict or other decision may be vacated and
a new trial granted on the application of the party
aggrieved for any of the following causes materially
affecting the substantial rights of such party:
(1) irregularity in the proceedings of the court,
jury, or adverse party or any order of the court or abuse
of discretion by which either party was prevented from
having a fair trial;
(2) misconduct of the jury. Whenever any one or
more of the jurors have been induced to assent to any
general or special verdict or to a finding on any
question submitted to them by the court by a resort to
the determination of chance, such misconduct may be
proved by the affidavit of any one of the jurors.
Motions for a new trial based on irregularity in the proceedings of
the jury under § 25-11-102(l), MCA, may be made "on affidavits or
on the minutes of the court;" new trial motions based on jury
misconduct under § 25-ll-102(2), MCA, must be made "only on
affidavits." Section 25-11-104, MCA.
At the outset, we note the District Court's observation--in
its order denying Berg's motion for a new trial based on Flinders'
affidavit--that it was difficult to determine whether Berg was
proceeding under subsection (1) or (2) of § 25-11-102, MCA. It is
no more apparent to us on appeal. Therefore, we will address
Berg's reliance on the Flinders affidavit under both subsections.
Section 25-11-102(l), MCA
Berg contends that Flinders' affidavit relating the
"prejudgment remarks" Carroll made to him indicates Carroll's
disregard of the District Court's daily admonitions to the jury not
to discuss the case among themselves. According to Berg, that
7
conduct constitutes an irregularity in the jury proceedings which
prevented him from having a fair trial and entitles him to a new
trial under § 25-11-102(l), MCA.
As a general rule, the use of juror affidavits is confined
exclusively to cases alleging misconduct of the jury under 5 25-ll-
102(2), MCA. Rieger v. Coldwell (1992), 254 Mont. 507, 512, 839
P.2d 1257, 1260 (citing Rasmussen v. Sibert (1969), 153 Mont. 286,
293, 456 P.2d 835, 839). In Rasmussen, we held:
[Jluror affidavits are not permissible in support of a
motion for new trial under subd. 1 of section 93-5603
[now § 25-11-102, MCAI; their use is confined exclusively
to cases of misconduct of the jury under subd. 2 of that
statute. . .
We base this holding, in part, on statutory
language. Section 93-5603, R.C.M. 1947 [now § 25-11-102,
MCAI , sets forth the grounds on which a new trial may be
granted. Only on the ground mentioned in subd. 2, i.e.
juror misconduct, are juror affidavits authorized as
proof. The following statute, section 93-5604, R.C.M.
1947 [now 5 25-11-104, MCAI, provides that affidavits may
be used in support of a motion for new trial under subd.
1 and that they must be used under subd. 2 and three
other subdivisions. It is clear to us that the
affidavits referred to therein, with the sole exception
of juror affidavits specificallv authorized under subd.
2 of section 93-5603 [now 5 25-11-102. MCAl, are
affidavits of counsel, potential witnesses on retrial,
court reporters, and others with knowledge of the facts
on which the srounds for a new trial are based. .
Rasmussen, 456 P.2d at 839 (emphasis added).
Berg contends, however, that Ahmann v. American Fed. Sav. &
Loan Ass'n (1988), 235 Mont. 184, 766 P.2d 853, allows
consideration of the Flinders affidavit in support of his § 25-ll-
102(l), MCA, new trial motion. In Ahmann, the alleged irregularity
in the proceedings did not involve alleged juror misconduct; rather
it concerned conduct of a bailiff in a conversation with one of the
8
jurors Ahmann, 766 P.2d at 856. We noted our Rasmussen holding
that affidavits of counsel, court personnel and potential witnesses
on retrial are permissible to support a new trial motion under
§ 25-11-102(l), MCA, but affidavits of jurors are not. Ahmann, 766
P.2d at 856-57. We concluded, however, that, where the only two
people with personal knowledge of the alleged irregularity are a
juror and the individual who committed the alleged infraction,
juror affidavits would be admissible under 5 25-11-102(l), MCA;
under such facts, it would be irrational to permit the use of the
bailiff's affidavit, but not the juror's, Ahmann, 766 P.2d at 857.
We also observed that the bailiff's conduct constituted an outside
influence on the jury for which a juror affidavit properly could be
considered pursuant to Rule 606(b), M.R.Evid., and warned that only
the facts regarding the alleged irregularity, and not any
allegations relating to the effect of such an irregularity on the
jurors' thought processes, were admissible even in a situation like
that before us in Ahmann. Ahmann, 766 P.2d at 857.
Ahmann is distinguishable from the situation presently before
us. The irregularity asserted by Berg in this case involves
allegedly improper communications from one juror to another. It
does not involve conduct or communications between a nonjuror and
a juror. Therefore, the limited and carefully drawn Ahmann
exception to the Rasmussen prohibition against use of a juror
affidavit in support of a § 25-11-102(l), MCA, motion for a new
trial is not applicable here.
9
We conclude that the Flinders affidavit could not be
considered in conjunction with Berg's motion for a new trial under
§ 25-11-102(l), MCA.
Section 25-ll-102(2), MCA
Berg's motion for a new trial also was premised on his
contention that Carroll's remarks constituted juror misconduct
under § 25-ll-102(2), MCA. In denying Berg's motion, the District
Court noted the general prohibition against using juror affidavits
to impeach the verdict contained in Rule 606(b), M.R.Evid., and
determined that the Flinders affidavit did not fall within the
exceptions to that general prohibition under which it could
consider the affidavit. On appeal, Berg claims that the misconduct
set forth in Flinders' affidavit was an external influence on the
jury and, therefore, that Rule 606(b), M.R.Evid., permits
consideration of the affidavit.
"[A] juror may not testify as to . . the effect of anything
upon that or any other juror's mind or emotions as influencing the
juror to assent or dissent from the verdict or indictment or
concerning the juror's mental processes in connection therewith."
Rule 606(b), M.R.Evid. Insofar as is relevant to Berg's argument
here, however, a juror may testify about what occurred during jury
deliberations when the information pertains to whether extraneous
prejudicial information was improperly brought to the jury's
attention or whether any outside influence was brought to bear on
any juror. Rule 606(b), M.R.Evid.; Kelman, 915 P.2d at 859;
Broqan, 900 P.2d at 287. Thus, while juror affidavits may not be
10
used to impeach a verdict based on internal influences on the jury,
such as a mistake of evidence or misapprehension of the law, they
can provide the basis for overturning a judgment where external
prejudicial information is brought to the jury's attention or
external influence is exerted on the jury. Kelman, 915 P.2d at 860
(citing Brogan, 900 P.2d at 287).
We must determine, therefore, whether the conduct of juror
Carroll set forth in Flinders' affidavit was an external influence
on the jury so as to permit consideration of the Flinders
affidavit. Examples of external prejudicial information brought to
the jury's attention or external influence exerted on the jury
include a juror's telephone call obtaining information with regard
to previous litigation by the plaintiff, visiting the scene of an
accident, or bringing a newspaper article about the trial into the
jury room for the jurors to see. Kelman, 915 P.2d at 860
(citations omitted). Juror Carroll's remarks to Flinders are not
similar in any way to the clearly external matters described in
Kelman. Indeed, those remarks by one juror to another contain no
external information and, because they relate solely to juror
Carroll's thoughts about the evidence presented and another juror,
they do not constitute an external influence on the jury. We
conclude, therefore, that the Flinders affidavit describing juror
Carroll's statements did not fall within an exception to the
general prohibition against use of juror affidavits to impeach a
verdict contained in Rule 606(b), M.R.Evid.
Berg also contends that § 25-11-102, MCA, requires a new trial
in cases where the substantial rights of a party have been
affected. We need not address this contention, however, given our
conclusion above that Carroll's conduct was not an external
influence and, therefore, that the jury verdict cannot be impeached
via Flinders' affidavit.
Finally, Berg argues that the conduct of juror Carroll
reflected in Flinders' affidavit constituted a prejudgment of the
case which violated both the statutory proscription contained in
§ 25-7-402, MCA, and the District Court's daily admonitions
thereunder that discussions between jurors could occur only at the
conclusion of the case and in the presence of all of the jurors.
Recognizing that we have not previously addressed juror misconduct
of this type, Berg urges us to follow California's lead on this
issue and conclude that Carroll's conduct prejudiced his
constitutional right to a fair and impartial jury so as to require
a new trial. Berg relies primarily on In re Hitchings (Cal. 1993),
860 P.2d 466; Andrews v. County of Orange (Cal.Ct.App. 1982), 182
Cal. Rptr. 176; and Deward v. Clough (Cal.Ct.App. 1966), 54 Cal.
Rptr. 68. Andrews is the most analogous factually to the case
presently before us.
In Andrews, juror affidavits were submitted in support of a
motion for a new trial based on juror misconduct. Andrews, 182
Cal. Rptr. at 180. Among the information disclosed in the juror
affidavits was a possible prejudgment of the case by one juror in
contravention of the statutorily-required admonition by the trial
12
court. An&em, 182 Cal. Rptr. at 183. As a necessary
prerequisite to determining whether the plaintiffs had been
deprived of a fair trial, the California court reviewed applicable
California law regarding the use of juror affidavits to impeach a
verdict. Under Cal. Evid. Code § 1150, "any otherwise admissible
evidence" could be submitted to impeach a verdict based on
"statements made, or conduct, conditions, or events occurring,
either within or without the jury room, of such a character as is
likely to have influenced the verdict improperly." Andrews, 182
Cal. Rptr. at 180 n.4. The only limitation on evidence admissible
to impeach a verdict under California law is that no evidence may
be submitted regarding the "effect of such statement, conduct,
condition, or event upon a juror either in influencing him to
assent to or dissent from the verdict or concerning the mental
processes by which it was determined." Andrews, 182 Cal. Rptr. at
180 n.4. Having determined that the juror affidavits could be used
to impeach the verdict, the court concluded that a juror had
prejudged the case and the plaintiffs had not received a fair
trial. Andrews, 182 Cal. Rptr. at 184.
Andre% clarifies that California law regarding the use of
juror affidavits differs significantly from Montana law. Under
California law, juror affidavits generally are admissible to
impeach a verdict regarding objective conduct or events either in
or out of the jury room which may have influenced the verdict
improperly; the only limitation is that an affidavit cannot be used
to establish the effect of such conduct or events on a juror's
13
decision regarding the verdict or on the jury's mental processes in
reaching the verdict. In Montana, on the other hand, juror
affidavits generally cannot be used to impeach a verdict regarding
either matters occurring during the jury's deliberations or the
effect of conduct or events on a juror's decision regarding the
verdict or the mental processes by which the verdict was
determined. Rule 606(b), M.R.Evid. The only exception to the
general prohibition is narrowly drawn and, as we have concluded
above, inapplicable here. Thus, while Andrews is factually similar
to the case presently before us, the significant differences
between California law and Montana law regarding the use of juror
affidavits preclude its application here.
We conclude that the District Court did not abuse its
discretion in denying Berg's motion for a new trial under § 25-ll-
102, MCA.
2. Did the District Court abuse its discretion in
denying Berg's motion for a new trial which was based on
failure to instruct the jury on the definition of
"misrepresent?"
Question No. 2 on the special verdict form asked the jury
whether Berg misrepresented payroll, employee status and employee
duties by misclassifying his workers to the State Fund. The jury
responded in the affirmative. Berg moved for a new trial based on
the District Court's failure to instruct the jury on the definition
of the word "misrepresent," maintaining that the District Court and
all trial counsel, including his own, were at fault in this regard.
The District Court denied Berg's motion. We review a district
14
court's denial of a motion for a new trial to determine whether the
district court abused its discretion. Kelman, 915 P.2d at 859;
Broqan, 900 P.2d at 286.
We note, at the outset, that Berg did not offer an instruction
defining the word "misrepresent." Rule 51, M.R.Civ.P., provides
that "[nlo party may assign as error the failure to instruct on any
point of law unless that party offers an instruction thereon."
Where no instruction was offered by the party asserting a trial
court's failure to instruct, the party is precluded from assigning
error in that regard. Werre v. David (1996), 275 Mont. 376, 394,
913 P.2d 625, 636; State v. Courchene (1992), 256 Mont. 381, 388,
847 P.2d 271, 275.
Berg urges that, notwithstanding his failure to offer an
appropriate instruction, the "plain error" doctrine applies. Under
very limited circumstances, the plain error doctrine permits review
of errors not objected to at trial which result in substantial
injustice by denying a party a fair trial. Geiser, 866 P.2d at
1108 (citing Rule 103(d), M.R.Evid.; Halldorson v. Halldorson
(1977), 175 Mont. 170, 573 P.2d 169); Guertin v. Moody's Market,
Inc. (1994), 265 Mont. 61, 67, 874 P.2d 710, 714. However,
"'[pIlain error' generally involves an act or omission of a more
serious nature than 'reversible error,' and only on rare occasion
is the former doctrine invoked in civil cases." Geiqer, 866 P.2d
at 1108 (quoting Reno v. Erickstein (1984), 209 Mont. 36, 42, 679
P.2d 1204, 1207-08).
15
Berg relies on State Bank of Townsend v. Maryann's, Inc.
(1983), 204 Mont. 21, 664 P.2d 295, in contending that the District
Court's failure to instruct the jury on the definition of the word
"misrepresent" affected his right to a fair trial. His reliance on
State Bank of Townsend is misplaced.
In State Bank of Townsend, the trial court had prepared an
extensive pretrial order which included agreed facts and both
parties' contentions. State Bank of Townsend, 664 P.2d at 298. It
appeared from the jury instructions that the theory of the
defendants' case had changed during the course of the trial,
resulting in confusion on the part of both the attorneys and the
trial court regarding the law of the case. State Bank of Townsend,
664 P.2d at 298. As a result, contradictory and confusing
instructions were given to the jury and we were unable to determine
what the jury had been instructed to do or what the jury had done.
State Bank of Townsend, 664 P.2d at 298-99. Despite the absence of
adequate objections to the instructions, we applied the plain error
doctrine because the error affected the substantial right of both
parties to instructions which correctly set forth a legal basis for
assessing damages, as well as an understandable method of computing
the amount of such damages. State Bank of Townsend, 664 P.2d at
300.
Here, there was no change in legal theory over the course of
trial and no resulting contradictory and confusing j uw
instructions. Moreover, both parties had a significant amount of
time to review proposed jury instructions and submit additional
16
instructions as needed. Trial counsel simply failed to propose an
instruction defining "misrepresent" in the ordinary course of
events.
In addition, Berg helped draft the special verdict form
containing the word "misrepresent" and did not object to it. A
district court will not be put in error for a ruling or procedure
in which the appellant acquiesced or participated, or to which the
appellant made no objection. In re Pedersen (19931, 261Mont. 284,
287, 862 P.2d 411, 413.
We decline to apply the plain error doctrine to the case
presently before us. We conclude that the District Court did not
abuse its discretion in denying Berg's new trial motion which was
based on instructional error.
3. Did the District Court abuse its discretion in
denying Berg's motion to vacate the judgment and enter
judgment in his favor which was based on the State Fund's
failure to plead constructive fraud with sufficient
particularity?
In his motion to vacate the judgment, Berg argued that the
State Fund failed to sufficiently plead constructive fraud in its
amended complaint. The District Court denied his motion and
determined that, when the amended complaint was filed, Berg was put
on notice regarding the allegations of constructive fraud and that
he was not prejudiced due to a lack of actual notice or
understanding of the allegations regarding constructive fraud. The
District Court concluded that the pleadings were not so defective
as to require that the judgment in favor of the State Fund be
vacated
17
We review a trial court's discretionary rulings, such as trial
administration issues, rulings on posttrial motions and similar
rulings, to determine if the trial court abused its discretion.
Van Loan v. Van Loan (1995), 271 Mont. 176, 178, 895 P.2d 614, 615
(citing Montana Rail Link v. Byard (1993), 260 Mont. 331, 337, 860
P.2d 121, 125).
Constructive fraud is statutorily defined in Montana as:
(1) any breach of duty which, without an actually
fraudulent intent, gains an advantage to the person in
fault or anyone claiming under him by misleading another
to his prejudice or to the prejudice of anyone claiming
under him; or
(2) any such act or omission as the law especially
declares to be fraudulent, without respect to actual
fraud.
Section 28-2-406, MCA. Pursuant to Rule 9(b), M.R.Civ.P., the
circumstances constituting fraud must be stated with particularity.
To establish a prima facie case of actual fraud, the party
asserting the claim must present proof of nine elements: (1) a
representation; (2) its falsity; (3) its materiality; (4) the
speaker's knowledge of its falsity or ignorance of its truth;
(5) the speaker's intent that it should be acted upon by the person
and in the manner reasonably contemplated; (6) the hearer's
ignorance of its falsity; (7) the hearer's reliance upon its truth;
(8) the hearer's right to rely upon it; and (9) the hearer's
consequent and proximate injury or damage. Davis v. Church of
Jesus Christ (1993), 258 Mont. 286, 293, 852 P.2d 640, 644 (citing
Lee v. Armstrong (1990), 244 Mont. 289, 293, 798 P.2d 84, 87). A
claim of misrepresentation or constructive fraud requires similar
proof, except that the plaintiff need not prove the fifth element
18
relating to intent to deceive or dishonesty of purpose. Davis, 852
P.2d at 644 (citing Lee, 798 P.2d at 88)
The State Fund's claim against Berg for constructive fraud was
pleaded as follows:
COUNT VI
CONSTRUCTIVE FRAUD
§ 28-2-406, MCA
27. Plaintiff incorporates by reference Counts I
through V, as though fully set forth herein, and by
way of further allegation states as follows:
28. [Berg] , without actual intent to commit fraud, did
engage in a pattern of under-reporting and non-
reporting of payroll, employee status and employee
duties in an effort to reduce the proper premium
payments which should have been made to Plaintiff,
which did mislead the Plaintiff to its prejudice.
Said conduct amounts to constructive fraud pursuant
to § 28-2-406, MCA.
29. [Berg's] conduct has caused damage to the Plaintiff
in excess [sic] Four Hundred Two Thousand Three
Hundred Twenty And 05/100 ($402,320.05) dollars,
the exact amount to be proven at trial.
In previous Counts incorporated by reference in the constructive
fraud claim, the State Fund alleged that Berg obtained a workers'
compensation insurance policy from the State Fund which required
him to submit timely payroll reports, remit payment of premiums
billed and allow the State Fund to audit his books and records to
determine whether proper payroll reports and premiums were
submitted and paid. It also alleged that an audit of Berg's
operations completed on or about July 19, 1991, resulted in Berg
being billed an additional $390,131.56 for premiums due for the
periods audited. Finally, the State Fund alleged that Berg's
conduct constituted a pattern of misrepresentation.
19
Berg contends that the State Fund's amended complaint is
defective because not all elements of a constructive fraud claim
are alleged with particularity. However, the appropriate interplay
between the "particularity" requirement of Rule 9(b), M.R.Civ.P.,
and Montana's "notice pleading" rule is well established.
"Of primary importance in understanding the
particularity requirement of Rule 9(b) is the recognition
that it does not render the general principles set forth
in Rule 8 entirely inapplicable to pleadings alleging
fraud; rather, the two rules must be read in conjunction
with each other. It should be kept in mind that Rule
8(a) requests 'a short and plain statement of the claim'
for reliefF.1 . Thus, it is inappropriate to focus
exclusively on the fact that Rule 9 (b) requires
particularity in pleading fraud. This is too narrow an
approach and fails to take account of the general
simplicity and flexibility contemplated by the rules[.]
. .
The sufficiency of a particular pleading under Rule
9(b) depends upon a number of variables. For example,
the degree of detail required often turns on the context
in which the fraud is alleged to have occurred[.l
Perhaps the most basic consideration in making a judgment
as to the sufficiency of a pleading is the determination
of how much detail is necessary to give adequate notice
to an adverse party and enable him to prepare a
responsive pleading." Wright & Miller, Federal Practice
and Procedure: Civil § 1298, p. 406-07, 410, 4151.1
Irving v. School Dist. No. l-1A (1991), 248 Mont. 460, 467, 813
P.2d 417, 421 (quoting Fraunhofer v. Price (1979), 182 Mont. 7, 14-
15, 594 P.2d 324, 328-29).
We focus first on the "most basic consideration" in
determining the sufficiency of a pleading under the so-called
Fraunhofer rule; namely, whether the State Fund's allegations of
constructive fraud were sufficiently detailed to provide Berg with
adequate notice of the claim so as to enable him to prepare a
responsive pleading. & Irvinq, 813 P.2d at 421. The State Fund
20
alleged a constructive fraud claim based on Berg's pattern of
misrepresentation via underreporting and nonreporting of payroll,
employee status and employee duties under his workers' compensation
insurance policy with the State Fund. It further alleged that
Berg's conduct reflected an effort to reduce the proper premiums he
owed the State Fund and that the State Fund was misled by his
conduct vis-a-vis calculation of his workers' compensation
insurance premiums. Finally, the State Fund alleged that it was
damaged by Berg's conduct in the amount of underbilled workers'
compensation insurance premiums.
Berg did not contend in the District Court, and does not
contend in this Court, that the allegations provided insufficient
notice of the claim or were so lacking in detail as to negate his
ability to prepare responsive pleadings. Indeed, in answering the
claim, he denied the allegations of constructive fraud. Berg later
filed a motion for summary judgment and supporting brief on a "time
limitations" issue pursuant to the policy in which he argued, in
part, that his reporting practices to the State Fund were not
fraudulent. Berg again denied the allegations of actual and
constructive fraud in the pretrial order and stated that he did not
admit any fraud. Thus, Berg's own conduct in responding to the
claim and putting the State Fund to its proof belies any notion
that its allegations of constructive fraud were insufficient to
provide adequate notice and enable Berg to respond.
In addition, it is appropriate to consider the context in
which the fraud is alleged to have occurred in determining how much
21
detail is required to render a pleading sufficiently particular
under Rule 9(b), M.R.Civ.P. Irvinq, 813 P.2d at 421. Here, Berg
and the State Fund had been involved in an insured-insurer
relationship via Berg's State Fund workers' compensation insurance
policy for some fifteen years at the time the original complaint
was filed in this case. Berg's policy required him to timely and
accurately report employee wages so the State Fund could calculate
his workers' compensation insurance premiums. His own reports,
together with the findings of the audit of his operations--of which
he was aware and in which he was involved--formed the basis for the
State Fund's action against him for constructive fraud. In this
context, requiring more detailed allegations of constructive fraud
would serve no rational purpose and would exalt form over
substance. Indeed, to do so would ignore the "general simplicity
and flexibility [in pleading] contemplated by the rules . . .'I
See Irvinq, 813 P.2d at 421.
Berg contends that C. Haydon Ltd. v. Montana Min. Properties
(1993), 262 Mont. 321, 864 P.2d 1253, overrules the appropriate
interplay between Rules 8(a) and 9(b), M.R.Civ.P., which we
enunciated in Irvinq and Fraunhofer, leaving a strict requirement
that all elements of a fraud claim be pled with particularity. In
C. Havdon Ltd., we agreed with the district court's determination
that the defendant failed to meet the "particularity" requirements
of Rule 9(b), M.R.Civ.P., because various of its fraud allegations
were contradictory, based only "on information and belief" of
defendant's counsel, or unsupported by facts. C. Havdon Ltd., 864
22
P.2d at 1256. In addition, we observed that the defendant's
allegations did not address seven of the nine fraud elements at
all. C. Havdon Ltd., 864 P.2d at 1256. On that basis, we held
that the defendant failed to allege fraud with sufficient
particularity. We reaffirmed that Rules 9(b) and 8(a), M.R.Civ.P.,
must be harmonized, but noted that the statement of the claim
cannot be so short or plain, under Rule 8(a), M.R.Civ.P., as to
defeat the purposes of Rule 9(b), M.R.Civ.P. C. Havdon Ltd., 864
P.2d at 1256-57.
Here, the State Fund's claim for constructive fraud did not
contain either contradictory allegations or "information and
belief" allegations. While perhaps "inartful," as the District
Court stated, the State Fund's constructive fraud allegations were
not so short or so plain as to defeat the particularity requirement
of Rule 9(b), M.R.Civ.P., or the "most basic consideration"
underlying that requirement--namely, that the allegations provide
adequate notice to enable Berg to prepare responsive pleadings.
Moreover, as noted above, far from overruling the Fraunhofer rule
that Rules 8(a) and 9(b), M.R.Civ.P., be harmonized, C. Havdon Ltd.
clarified that neither Rule 8(a) nor Rule 9(b), M.R.Civ.P., can be
applied exclusively when determining whether a pleading alleges
fraud with sufficient particularity. See C. Havdon Ltd., 864 P.2d
at 1256-57.
On this record, we conclude that the State Fund's allegations
of constructive fraud were sufficient to meet the requirements of
Rules 8 and 9, M.R.Civ.P., and the Fraunhofer rule. We hold,
23
therefore, that the District Court did not abuse its discretion in
denying Berg's motion to vacate the judgment which was based on the
State Fund's failure to plead constructive fraud with sufficient
particularity.
4. Did the District Court abuse its discretion in
denying Berg's motion to vacate the judgment and enter
judgment in his favor which was based on a statute of
limitations bar to the constructive fraud claim?
Berg also based his motion to vacate the judgment on the two-
year statute of limitations contained in § 27-2-203, MCA. He
contended that the statute of limitations began to run on or about
February 24, 1989, when Knecht began the audit of his operations,
and had run prior to the State Fund filing its complaint in January
of 1992. In denying the motion, the District Court rejected
Berg's statute of limitations argument both procedurally and
substantively. In pertinent part, the District Court determined
that the statute of limitations defense was not included in the
pretrial order signed by the parties and that the pretrial order
was not amended to include that defense prior to trial. We review
discretionary trial court rulings to determine whether the court
abused its discretion. Van Loan, 895 P.2d at 615.
A party must set forth affirmatively any statute of
limitations defense in pleading to a preceding pleading. Rule
8 (cl , M.R.Civ.P. A pretrial order entered pursuant to Rule 16(e),
M.R.Civ.P., however, governs and controls the subsequent course of
the lawsuit unless modified by a subsequent order. See Zimmerman
v. Robertson (1993), 259 Mont. 105, 111, 854 P.2d 338, 342; Naftco
Leasing Ltd. v. Finalco, Inc. (1992), 254 Mont. 89, 93, 835 P.2d
24
728, 731. The purpose of pretrial orders is to prevent surprise,
simplify the issues and permit counsel to prepare their case for
trial on the basis of the pretrial order. Zimmerman, 854 P.2d at
342 (citing Workman v. McIntyre Const. Co. (1980), 190 Mont. 5, 617
P.2d 1281). Failure to raise an issue or theory in the pretrial
order may result in a waiver of that issue or theory. Nentwig v.
United Industry, Inc. (1992), 256 Mont. 134, 138, 845 P.2d 99, 102.
Here, Berg pleaded the statute of limitations as an
affirmative defense in answering the State Fund's amended
complaint, as required by Rule 8(c), M.R.Civ.P. Thereafter, and
via a discovery response, he abandoned this theory. Specifically,
in answer to an interrogatory requesting information about the
statute of limitations defense he had pleaded, Berg stated that he
"intend[ed] to abandon this defense." Moreover, the pretrial order
in this case, prepared by trial counsel for both parties and
approved by them as to form and content, does not contain a statute
of limitations defense by Berg. Given Berg's interrogatory
response, this is not surprising.
Pursuant to both its terms and Zimmerman, the pretrial order
superseded the pleadings and governed the subsequent course of the
action. We conclude that, because Berg did not include the statute
of limitations defense in the pretrial order, he waived that
defense. We hold, therefore, that the District Court did not abuse
its discretion in denying Berg's motion to vacate the judgment
which was based on the statute of limitations.
5 . Did the District Court err in denying the State
Fund's motion for a directed verdict which was based on
25
the existence of a disputable presumption of employee
status?
When Knecht began his audit of Berg's operations in February
of 1989, he questioned whether certain individuals were independent
contractors, as Berg claimed, or employees. He investigated the
status of the individuals and determined that all but twenty-three
of them were independent contractors. Knecht asked Berg for
additional information regarding the remaining twenty-three
individuals. He told Berg that, if the required documentation was
not provided, the individuals would be classified as Berg's
employees and additional workers' compensation premiums would be
owed for them. Berg did not provide any further information and
Knecht classified the individuals as Berg's employees. On that
basis, the State Fund alleged that Berg owed additional workers'
compensation premiums based on the unreported wages of the twenty-
three employees.
Before closing arguments at trial, the State Fund moved for a
directed verdict on the issue of workers' compensation premiums
owed by Berg on the unreported wages of the individuals Knecht
classified as employees but Berg contended were independent
contractors. The State Fund argued that § 39-71-120(2), MCA,
contains a presumption that an individual performing services for
remuneration is an employee unless the requirements of § 39-71-
120(l), MCA, for independent contractor status are met, and that
Berg had not rebutted that presumption by presenting evidence that
the twenty-three individuals were independent contractors. The
District Court denied the State Fund's motion. Although the
26
District Court did not specifically address whether § 39-71-120(2),
MCA, creates a presumption of employee status, it implicitly
concluded that the statute did not contain such a presumption in
denying the State Fund's motion for a directed verdict. The
District Court then allowed the jury to decide whether Berg owed
premiums for the twenty-three individuals and the jury returned a
verdict in Berg's favor.
A directed verdict should be granted only when there is a
complete absence of any evidence which would justify submitting an
issue to a jury; all inferences which can be drawn from the
evidence must be considered in a light most favorable to the
opposing party. Werre
, 913 P.2d at 630 (citing Pierce v. ALSC
Architects, P.S. (1995), 270 Mont. 97, 107, 890 P.2d 1254, 1260).
Under the law in effect during the time period covered by the
workers' compensation audit, an independent contractor was
statutorily defined as "one who renders service in the course of an
occupation" and:
(a) has been and will continue to be free from
control or direction over the performance of the
services, both under his contract and in fact; and
is engaged in an independently established
trade(bLccupation, profession, or business.
Section 39-71-120(l), MCA (1987). Pursuant to 5 39-71-120(2), MCA
(1987), "[aIn individual performing services for remuneration is
considered to be an employee under this chapter unless the
requirements of subsection (1) are met." (Emphasis added.)
When the facts surrounding an individual's arrangement with an
employer are relatively undisputed, the question of whether the
27
individual is an independent contractor or an employee is a
question of law. Potter v. Department of Labor & Ind. (1993), 258
Mont. 476, 479, 853 P.2d 1207, 1209 (citation omitted); see also
_-
Northwest Pub. v. Department of Labor & Ind. (1993), 256 Mont. 360,
362, 846 P.2d 1030, 1031 (citation omitted). We review a district
court's conclusions of law to determine whether they are correct.
TOPCO. Inc., 912 P.2d at 808.
The State Fund contends that the phrase "is considered to be"
in § 39-71-120(2), MCA (1987), creates a statutory presumption that
an individual providing services for another is an employee and not
an independent contractor. Therefore, according to the State Fund,
once sufficient facts are established to give rise to the
presumption, the party asserting independent contractor status
bears the burden of rebutting the presumption. Berg's sole
argument is that 5 39-71-120(2), MCA (19871, does not create a
disputable presumption of employee status because §§ 26-l-601 and
26-l-602, MCA, and Rule 301, M.R.Evid., contain an exhaustive and
exclusive list of conclusive and disputable presumptions which does
not include an employee status presumption pursuant to § 39-71-
120 (2) , MCA (1987).
Rule 301, M.R.Evid., defines presumptions and generally
addresses their classification and effect. All presumptions, other
than conclusive presumptions, are disputable presumptions and may
be controverted. Rule 301(b) (2), M.R.Evid. If a disputable
presumption is not overcome by a preponderance of the evidence, the
28
trier of fact must find the assumed fact in accordance with the
presumption. Rule 301(b) (2), M.R.Evid.
Section 26-l-601, MCA, states that ” [tl he following
presumptions are conclusive" and then specifically lists three
conclusive presumptions; subsection (4) provides that any other
presumption which, by statute, is expressly made conclusive is a
conclusive presumption. Thus, 5 26-l-601, MCA, limits conclusive
presumptions to those listed therein or expressly set forth in
other statutes.
The language of § 26-l-602, MCA, which addresses disputable
presumptions, is markedly different. It states that "[al11 other
presumptions are 'disputable presumptions' and may be controverted
by other evidence." Section 26-I-602, MCA. The statute then
states "[tlhe following are of that kind," and provides a listing
of thirty-eight disputable presumptions.
We have not previously addressed whether the list of
disputable presumptions contained in § 26-l-602, MCA, is
exhaustive. Certainly, the language of § 26-I-602, MCA, which
provides that "[tlhe following are of that kind [disputable
presumptions]" does not indicate an intent that the list be
exhaustive or exclusive. Moreover, while our Commission on Rules
of Evidence provided a table of statutory conclusive presumptions,
statutory disputable presumptions and common law disputable
presumptions, the Compiler's Comments clarify that the list of
presumptions in that table "is not intended as an authority for
whether or not any particular presumption exists, but only as a
29
research guide to presumptions generally." Part Compiler's
Comments, Title 26, chapter 1, part 6, Table D-Presumptions. The
Comments further state that "[tlhis list is intended only as an aid
to Montana judges and lawyers, and the inclusion or exclusion from
this table of any particular presumption should have no effect on
a court's treatment of that particular presumption." Part
Compiler's Comments, Title 26, chapter 1, part 6, Table D-
Presumptions. We conclude, therefore, that the absence of the
§ 39-71-120(2), MCA (1987), "is considered to be" language in the
§ 26-I-602, MCA, enumeration of disputable presumptions does not
establish that the phrase at issue here is not a disputable
presumption.
Moreover, in interpreting § 39-71-120(2), MCA (1987), we look
first to the plain meaning of the words it contains. Werre, 913
P.2d at 631 (citing Clarke v. Massey (1995), 271 Mont. 412, 416,
897 P.2d 1085, 1088); Gulbrandson v. Carey (1995), 272 Mont. 494,
500, 901 P.2d 573, 577. Where the language is clear and
unambiguous, the statute speaks for itself and we will not resort
to other means of interpretation. W
,erre 913 P.2d at 631 (citing
Clarke, 897 P.2d at 1088). "In the search for plain meaning, 'the
language used must be reasonably and logically interpreted, giving
words their usual and ordinary meaning.'" Werre, 913 P.2d at 631
(citations omitted).
"Consider" means to think about, regard or classify.
Webster's Third New International Dictionary 483 (1971).
Therefore, an individual who performs services for another person
may be thought about, regarded or classified as an employee unless
the requirements for independent contractor status are met. A
reasonable and logical interpretation of the phrase "is considered
to be" leads us to conclude that this phrase in 5 39-71-120(2), MCA
(1987), creates a disputable presumption of employee status and the
District Court erred in concluding to the contrary.
In order for the State Fund to rely on the employee status
presumption contained in § 39-71-120(2), MCA (1987), it necessarily
must have established that the individuals it contended were
employees had performed services for Berg for remuneration. &
§ 26-l-401, MCA. Berg does not dispute that the State Fund did so.
Having satisfied this threshold requirement, the State Fund became
entitled to the presumption that the twenty-three individuals were
Berg's employees. Section 39-71-120(2), MCA (1987). Thereafter,
the burden shifted to Berg to rebut the presumption by presenting
evidence establishing that the individuals were independent
contractors pursuant to § 39-71-120(l), MCA (1987), and our cases
thereunder. Section 26-l-602, MCA; Rule 301(b) (2), M.R.Evid.
As noted above, Berg's sole contention in responding to the
State Fund's cross-appeal is that § 39-71-120(2), MCA (1987), does
not constitute a disputable presumption of employee status and,
therefore, that he bore no burden of establishing that the twenty-
three individuals were independent contractors. We have concluded
otherwise. Because Berg did not dispute the fact that the twenty-
three individuals had performed services for him for remuneration
and because he does not argue that he met his burden of
31
establishing independent contractor status for the individuals in
question, Rule 301(b) (2), M.R.Evid., and Potter required the
District Court to direct a verdict as a matter of law that the
twenty-three individuals were Berg's employees in accordance with
the presumption contained in 5 39-71-120 (2) , MCA (1987).
Therefore, we hold that the District Court erred in denying the
State Fund's motion for a directed verdict which was based on the
existence of a disputable presumption of employee status.
Affirmed in part, reversed in part, and remanded for further
proceedings consistent with this opinion,
J,&stices
32