Kestell v. Heritage Health Care Corp.

NO. 93-147
IN THE SUPREME COURT OF THE STATE OF MONTANA
1993

JOHN KESTELL,
Plaintiff and Respondent,
-vs-
HERITAGE HEALTH CARE CORPORATION,
d/b/a GLACIER VIEW HOSPITAL,
a Washington corporation, STERLING
CORPORATION, d/b/a GLACIER VIEW
HOSPITAL,
Defendants and Appellants.

APPEAL FROM: District Court of the Eleventh Judicial District,
In and for the County of Flathead,
The Honorable Michael H. Keedy, Judge presiding.

COUNSEL OF RECORD:
For Appellant:
Daniel W. Hileman; Murray & Kaufman, Kalispell
Montana
For Respondent:
Elizabeth A. Best, Attorney at Law, Great Falls,
Montana

I
'Clerk
Justice Karla M. Gray delivered the Opinion of the Court.

Heritage Health Care Corporation and its owner, Sterling

Corporation, doiny business as Glacier View Hospital in Kalispell,

Montana, appeal from judgment on a jury verdict in the Eleventh

Judicial District Court, Flathead County. The jury found that the

appellants (collectively, the hospital) wrongfully discharged the

respondent John Kestell (Kestell). We affirm.

The following issues are raised on appeal:
1. Did the District Court err in denying the hospital's
motions for directed verdict and judgment notwithstanding the
verdict on Kestell's wrongful discharge claim?
2 . Did the District Court err in allowing a proposed release
into evidence?

3. Did the District Court err in instructing the jury?

4 . Were the damages awarded by the jury excessive as a matter
of law?

In September 1989, Jerry Wetherbee, a Sterling Corporation

officer, and Brent Porges, administrator of Glacier View Hospital,

offered Kestell a position as director of the hospital's chemical

dependency unit. He had been working as an inpatient supervisor at

Rimrock Foundation in Billings, Montana, but had accepted a new

position with a similar facility in Roseburg, Oregon. Porges and

Wetherbee persuaded Kestell to change his plans and come to

Kalispell by increasing their salary offer and promising ninety

days notice of any termination during Kestell's first year of

employment.

Kestell testified that he was hired to increase the number of

2
patients in the chemical dependency unit, in part by expanding its
services to include addictive disorders other than chemical
dependency. He began work at Glacier View Hospital on September
25, 1989, under an employment agreement that established his base
pay at $3,583.34 per month and provided for quarterly bonuses based
on the number of paying patients in the chemical dependency unit.
The agreement a:Lso included a reciprocal ninety-day notice
provision.
Porges evaluated Kestell's performance in March 1990, at the
end of his six-month probationary period. In his report Porges
praised Kestell's, marketing efforts and his commitment to his
patients and to quality treatment, and he noted approvingly that
Kestell had "opened up the patient environment" by allowing
chemical dependency patients the freedom to mix with psychiatric
patients. Although he indicated that Kestell "needed improvement"
in several areas, Porges did not rate his performance as
unsatisfactory in any of the twelve areas listed.
Two months later, on June 12, 1990, Wetherbee and Porges told
Kestell that his position had been eliminated and that another job
would be found for him. At a staff meeting the same day, Kestell
learned that the hospital had entered into an agreement with Health
Management Corporation (HMC), which provided that HMC would assume
full management r,esponsibility for the chemical dependency unit.
Kestell was told that he would be replaced as director by HMC's
employee and, in fact, HMC's employee, Mike DuHoux, began work as
director of the chemical dependency unit on or about July 1, 1990.

3
 Soon after June 12, 1990, Kestell was moved to a "group room"
in the psychiatrio wing of the hospital so that his former office
in the administrative wing could be remodeled for DuHoux. Kestell
testified that he was given a desk but no work assignments or
responsibilities, and that he was expected to leave the room when
group therapy sessions were scheduled.
Wetherbee suggested that Kestell apply for one of the
counseling jobs vacated when HMC took over the chemical dependency
unit, but Kestell refused. He testified that his salary as
director of the unit had been approximately $48,000 per year,
including bonuses, while the counselor position would have paid
approximately $25,000; that he had had no recent experience in
daily counseling; and that the offer was a U'humiliation."
Wetherbee also offered Kestell an opportunity to apply for a
marketing job with Sterling Corporation, but Kestell testified that
he could not afford to consider this because it would have meant
relocating to Idaho. He already owned houses in Billings and
Kalispell and was unwilling to move his children a second time in
the same year.
On June 29, 1990, Porges sent Kestell a formal termination
letter, referring to their employment agreement and stating that:
[Y]ou will :be relieved of your duties as [chemical
dependency] program director as of July 1, 1990. As we
agreed, your base salary will remain the same for 90
days. . . . Though you should consider this letter as
your 90 day notice per agreement, we will continue to
honor our agreement to work with you, the new Director
and the Management Consultant Team, to negotiate an
acceptable position with the [chemical dependency]
program.

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In response, Kestell wrote to Porges, reminding him that his
performance as director had been an asset to the hospital and
stating that he had been offered a lower position with less
responsibility and respect. He warned the hospital that if it did
not reinstate him, he would pursue legal remedies under the Montana
Wrongful Discharge from Employment Act.
Kestell continued to spend eight hours at his desk in the
psychiatric unit every day, five days a week, until July 18, 1990.
On that day Porges showed him a letter from the hospital's lawyer,
dated July 13, 1990, which expressed the opinion that Kestell had
not been wrongfully discharged because his position had been
eliminated. Kestell testified that he read this letter as an
expression of bad faith on the part of the hospital administration
and immediately left the premises. The hospital continued to pay
his base salary through September 1990.
Kestell soon found a marketing position with the Rocky
Mountain Treatment Center in Great Falls, but he could not afford
to move and was forced to commute from Kalispell on a daily or
weekly basis. He was laid off eight months later and subsequently
opened a private practice in Kalispell. At the time of the trial
in December 1992, he was making approximately $1,200 a month in his
private practice and $600 a month as executive director of a low-
income counseling facility in Kalispell.
Kestell filed a wrongful discharge complaintin November 1990,
seeking award of wages and fringe benefits for four years from the
date of discharge. The hospital admitted in its answer that

5
Kestell had been relieved of his duties as director of the chemical
dependency unit but denied that he had been discharged, alleging
instead that Kestell's position had been eliminated pursuant to the
hospital's contract with HMC.
Kestell amended his complaint in July 1991to join HMC and its
two shareholder-directors individually, alleging that HMC or its
directors had tortiously interfered with his employment contract:
intentionally or negligently inflicted severe emotional distress;
and acted with actual fraud or actual malice. HMC and its
directors immediately moved to dismiss Kestell's claims against
them.
The hospital moved for summary judgment in August 1991. It
argued that its employment agreement with Kestell ended when it
contracted with HMC for management of the chemical dependency unit,
and that no discharge had occurred because Kestell resigned before
the ninety-day notice period had expired.
The District Court denied both motions. It determined that
genuine issues of material fact existed as to whether Kestell quit:
whether his position was eliminated; whether DuHoux served in the
same capacity: and whether the hospital had a legitimate business
purpose in contracting with HMC. It also determined that the
individual liability of HMC's directors was a genuine issue of
material fact because HMC had not filed its articles of
incorporation when its directors signed the contract with the
hospital.
The jury trial began on November 30, 1992. After three days

6
of testimony, the jury returned a special verdict, finding that the
hospital had wrongfully discharged Kestell and awarding damages in
the amount of $123,600. The jury also found that HMC and its
directors did not tortiously interfere with Kestell's employment
contract or intentionally inflict emotional distress. The hospital
appealed. Because Kestell did not cross-appeal, HMC and its
directors are not involved in this appeal.
I
Did the District Court err in denying the hospital's motions
for directed verdict and judgment notwithstanding the verdict on
Kestell's wrongful discharge claim?
The hospital moved for a directed verdict during the trial
and, later, for judgment notwithstanding the verdict. The District
Court denied both motions on the ground that the evidence was
sufficient for the jury to find that Kestell was wrongfully
discharged.
In considering a motion for a directed verdict or for judgment
notwithstanding the verdict, the district court must view the
evidence in a light most favorable to the non-moving party. A
motion for directed verdict must be denied if there is any evidence
that warrants submission to the jury. Wilkerson v. School District
No. 15, Glacier County (1985), 216 Mont. 203, 211, 700 P.2d 617,
622. A motion for judgment notwithstanding the verdict must be
denied if it appears that the non-moving party can recover upon any
view of the evidence, including legitimate inferences to be drawn
from it. Larson v. K-Mart Corp. (1990), 241 Mont. 428, 433, 787

7
P.2d 361, 364.

The hospital contends, on appeal, that the evidence did not

warrant submitting the wrongful discharge issue to the jury. It

supports this contention by arguing first, that Kestell was not

discharged at all, and second, that if he was discharged, it was

for legitimate business reasons. We will address each of these

contentions separately.

Constructive Discharge

To prevail on a wrongful discharge from employment claim, an
employee must establish that he or she was discharged and that the

discharge was wrongful. Montana Wrongful Discharge from Employment
Act, §§ 39-2-901, et seq., MCA. Under 5 39-2-903(2), MCA,

V8dischargeS* includes resignation, layoff, job elimination and

constructive discharge, which is defined in 5 39-2-903(l), MCA, as

the voluntary termination of employment by an employee
because of a situation created by an act or omission of
the employer which an objective, reasonable person would
find so intolerable that voluntary termination is the
only reasonable alternative.

Kestell has proceeded on a constructive discharge theory from

the outset. The hospital argues that he was neither actually nor

constructively discharged, because he was told when his position

was eliminated that he would be given a job within the

organization. From the hospital's point of view, Kestell simply

guit, without waiting for the hospital to negotiate an acceptable

position for him.

The hospital contends that constructive discharge cannot apply

here because this Court has recognized it only in cases where the

8
plaintiff belonged to a protected class or had been criminally
prosecuted by the employer. In neither of the two cases relied on
to support this contention, however, did we hold that constructive
discharge was limited to the factual scenario in the case. Snell
v. Montana-Dakota Utilities Co. (1982), 198 Mont. 56, 643 P.2d 841;
Niles v. Big Sky :Eyewear (1989), 236 Mont. 455, 771 P.2d 114.
Moreover, the Wrongful Discharge Act clearly controls the
case now before us. Nothing in its definition of constructive
discharge, quoted above, indicates that the legislature intended to
limit its application to protected classes or to instances in which
the employee was criminally prosecuted.
In Snell a.nd Niles, both pre-Act cases, we defined
constructive discharge essentially as it is now defined in the Act.
We held in those cases, as we hold here, that to determine whether
an employee has been constructively discharged, the fact finder
must decide whether the employer has rendered working conditions so
intolerable that resignation is the only reasonable alternative.
Niles, 771 P.2d at 118. A determination of constructive discharge
"depends on the totality of circumstances, and must be supported by
more than the employee's subjective judgment that working
conditions are intolerable." Snell, 643 P.2d at 846.
Here, credible evidence in the record shows that Xestell, a
highly qualified professional and experienced supervisor, was
abruptly removed from his post, isolated in a different wing of the
hospital, and deprived of meaningful activity. He testified that
other employees began to treat him as a "non-person," looking the

9
other way when he approached and refusing to acknowledge his
presence. It is undisputed that he was not offered a comparable
position, but only an opportunity to apply for a job that he had
previously supervised.
We conclude that the record, viewed in a light most favorable
to Kestell, contains sufficient evidence for the jury to determine
that the hospital rendered Kestell's working conditions
intolerable. The District Court, therefore, did not err in
submitting the constructive discharge question to the jury.
Lecitimate Business Reasons
Under the Wrongful Discharge Act, discharge of a post-
probation employee such as Xestell is wrongful if it is not for
good cause. The Act defines "good cause" as "reasonable job-
related grounds for dismissal based on a failure to satisfactorily
perform job duties . . . or other legitimate business reason."
Section 39-2-903(5), MCA. Testimony by Wetherbee and the hospital
personnel manager established that Kestell was not terminated for
unsatisfactory performance. The issue, therefore, is whether
Kestell's termination was justified by a legitimate business
reason.
In Buck v. Billings Montana Chevrolet, Inc. (1991), 248 Mont.
276, 281-82, 811 P.2d 537, 540, we defined "legitimate business
reason" as 'Ia reason that is neither false, whimsical, arbitrary or
capricious, and it must have some logical relationship to the needs
of the business." We applied this definition to a wrongful
discharge action brought by the former general manager of an

10
automobile dealership. When the dealership was sold, the buyer
replaced the plaintiff with one of its own long-term employees.
The plaintiff did not assert that the stated reasons for replacing
him were false, merely that his dismissal was not justified under
the Act.
We upheld summary judgment for the defendants in Buck because
the plaintiff failed to demonstrate that the new owner did not have
a legitimate business reason for replacing him. Under the facts
before us, the new owner's decision to install one of its own
people as manager was not false, whimsical, arbitrary or
capricious, and it had a logical relation to the needs of the
business. To conclude otherwise, we said, "would be to force a new
owner of a business to retain someone it did not know or perhaps
even trust to manage a large dollar investment." -I 811 P.2d at
Buck
541.
Similarly, we upheld summary judgment for the employer in
Cecil v. Cardinal Drilling Co. (1990), 244 Mont. 405, 797 P.2d 232,
because there was no genuine dispute over the fact that the
plaintiff was terminated for a legitimate business reason, that is,
the declining price of crude oil. Our rationale was that employers
should not be foreclosed from engaging in legitimate reductions in
force necessary to maintain the company's economic vitality.
Cecil, 797 P.2d at 234.
It is well-settled in our pre-Act cases that courts should not
intrude in the day-to-day employment decisions of business owners.
See, e.g., Coombs v. Gamer Shoe Co. (1989), 239 Mont. 20, 778 P.2d

11
885; Hobbs v. Pacific Hide and Fur Depot (1989), 236 Mont. 503, 771
P.2d 125. An employer's legitimate right to exercise discretion
over whom it will employ must be balanced, however, against the

employee's egualpy legitimate right to secure employment. Buck
-,
811 P.2d at 540. The balance should favor an employee who presents
evidence, and not mere speculation or denial, upon which a jury

could determine that the reasons given for his termination were

false, arbitrary or capricious, and unrelated to the needs of the

business. Cecil, 797 P.2d at 235.

Here, the hospital terminated Kestell's employment to
accommodate its contract with HMC, not to reduce its staff in

response to declining revenues. Wetherbee testified that the

primary reason for entering the contract with HMC was that it had
a "substantial likelihood of improving the performance of the
hospital." The hospital offers this need to improve performance as

its legitimate business reason for eliminating Kestell's position.

The evidence demonstrates, however, that the hospital did not

eliminate Kestell's position, but merely replaced Kestell with

DuHoux. First, testimony at the trial established that DuHoux's

job description was identical to Kestell's and that he received the

same base pay. Second, HMC's two shareholder-directors, Ken

Anderson and John Brekke, testified that neither of them supervised

DuHoux's work at the hospital or evaluated the performance of any

staff in the chemical dependency unit. DuHoux himself testified

that he had a "dual responsibilityt' to HXC and the hospital

administrator. Finally, DuHoux's personnel records and those of

12
his staff at the hospital were kept by the hospital administration,
and his business card identified him as an employee of the
hospital. HMC wrote DuHoux's paychecks, but Sterling Corporation
issued bimonthly checks to HMC for the exact amount of DuHoux's
salary until June 30, 1991, when HMC and the hospital terminated
their agreement and DuHoux became a hospital employee.
The hospital offered no evidence to show that replacing
Kestell with DuHoux was critical to its goal of enlarging its
clientele. In fact, the evidence does not suggest any significant
correlation between this replacement and the hospital's business
needs.
DUHOUX'S qualifications were inferior to Kestell's,
particularly in view of the hospital's November 1989 job
description, which stated that an applicant with a graduate degree
in counseling or human services would be preferred. DUHOUX'S

formal education beyond a high school diploma consisted of thirty
hours as a lEgeneralistlE in a junior college and a nine-month
chemical dependency counseling program at the University of
Minnesota: Kestell had a master's degree in counseling and
psychology.
DuHoux had no experience as an inpatient supervisor before he
replaced Kestell as director of the inpatient chemical dependency
unit at Glacier View Hospital. He had worked three years as
clinical director of a small treatment facility owned by John
Brekke, which provided "adventure training" for chemically

dependent male adolescents. DuHoux had worked there for three

13
years and had fifteen years' experience as a chemical dependency

counselor elsewhere. Kestell had worked several years directing
alcohol and drug programs for small agencies in Wisconsin and had
five years' experience as an inpatient supervisor at Rimrock
Foundation in Billings.
HMC shareholder-director Ken Anderson testified that HMC
preferred DuHoux for the job, despite his lack of formal
qualifications, because his "philosophical approach" was more
congenial than Kestell's, and because replacing Kestell with DuHoux
would "make Glacier View Hospital consistent with treatment in the
valley.*' This apparently was a reference to the fact that Anderson
and Brekke were both operating chemical dependency treatment
facilities in the Flathead valley. According to Anderson, the most
important philosophical difference between himself and Kestell was
that Kestell believed in treating other addictions simultaneously
with chemical dependency, which he and Brekke considered unethical.
No evidence was offered to show that the hospital reasonably could
have expected IiMC's philosophical approach to attract more
patients, and therefore more revenue, than had Kestell's approach.
In short, the record shows that the less qualified DuHoux
simply assumed Kestell's position in the hospital, and that
contrary to the hospital's allegations, the position was not
eliminated or even substantially changed.
The legitimate business reasons that justified termination in
Cecil and m are absent here. Unlike the employer in Cecil, the
hospital terminated Kestell's employment to accommodate its new

14
contract with BMC, not to further a legitimate reduction in staff
in response to declining revenues. In -I a new owner determined
Buck
that it was necessary to put a trusted employee of long standing in
charge of the operation; here, no new owner existed and the
hospital replaced Kestell, whose performance had proved
satisfactory, with an unknown individual who was arguably less
qualified and less experienced.
In short, Kestell presented evidence demonstrating that the
hospital's ostensible reasons for replacing him were false,
arbitrary or capricious and unrelated to the needs of the business,
and, therefore, that they did not constitute legitimate business
reasons under § 39-Z-903(5), MCA. We hold that the District Court
did not err in denying the hospital's motions for directed verdict
and judgment notwithstanding the verdict on Kestell's wrongful
discharge claim.
II
Did the District Court err in allowing a proposed release into
evidence?
The hospital contends that a release form presented to Kestell
in August 1990 was inadmissible under Rule 408, M.R.Evid. Fuller,
the hospital's business manager, asked Kestell to sign the document
before he received his first severance paycheck. In pertinent

part, it reads as follows:
With reference to the August [actually September] 20th,
1989 agreement, I hereby give you notice of my decision
to terminate prior to the 90 day notice period.
The terms of my separation are that the hospital agrees
to pay me 3 months salary as severance based on the date
15
 I was given notice, July 1, 1990. Severance will be paid
in three monthly installments. The first installment is
payable on signing of this release. . . .

I agree to release the hospital from any and all other
claims related to salary, bonuses and benefits. . . .

Rule 408, M.R.Evid., provides that evidence of offering or

accepting valuable consideration in attempting to compromise a

disputed claim is not admissible to prove liability for or

invalidity of the claim or its amount. At the time Kestell was

asked to sign this document, however, his claim for severance pay

was not disputed; both parties had signed the September 1989

agreement providing for severance pay. Further, the document was

not offered for the purposes prohibited by Rule 408, but rather to

show that the hospital did not intend to find Kestell another

position.

We conclude that the release form is not barred by Rule 408,
M.R.Evid. and that the District Court did not abuse its discretion

in admitting it into evidence.

III

Did the District Court err in instructing the jury?

At Kestell's request, and over the hospital's objections, the

District Court instructed the jury on tortious interference with

contract, infliction of emotional distress, and piercing the

corporate veil. On appeal, the hospital argues that the type of

damages available and the duty to mitigate damages under these

theories are substantially different from the damages and duty to

mitigate under the wrongful discharge claim. Therefore, the

hospital contends, Instructions 14 through 31 confused the jury and

16
jeopardized its right to a fair trial.
The disputed jury instructions clearly refer to Kestell's
claims against HMC and its directors, not to his wrongful discharge
claim against the hospital. Instruction 14, for example, begins:
I will now instruct you on the law relating to
[Kestell's] claim for damages as a result of the claims
against Defendants Anderson, Brekke and HealthManagement
Corporation for interference with his employment contract
and infliction of emotional distress.
Kestell joined Anderson, Brekke and BMC as defendants without
objection by the hospital: he clearly was entitled to jury
instructions covering his claims against them. The special verdict
form asked the jury to determine the hospital's liability
separately from that of HMC and its directors, and to determine
both liability and damages separately on each of Kestell's claims
against HMC and its directors.
The jury discharged its duty, assessing damages against the
hospital only for lost wages and benefits on Kestell's wrongful
discharge claim. It found no liability on the part of HMC and its
directors as to any of Kestell's claims against them. Nothing in
the jury's response to the special verdict form suggests that it
was in any way confused by the instructions. We conclude that the
District Court did not err in giving Instructions 14 through 31.
IV
Were the damages awarded by the jury excessive as a matter of
law?
The Wrongful Discharge from Employment Act provides that a
successful plaintiff may be awarded lost wages and fringe benefits

17
for a period not to exceed four years from the date of discharge,
plus interest. Interim earnings, "including amounts the employee
could have earned with reasonable diligence,1' must be deducted from
the amount awarded for lost wages. Section 39-2-905(l), MCA. The
jury was instructed on the exact language of the statute.
The hospital contends that the jury's award of $123,600 in
damages was excessive because Kestell had, "within days," accepted
a job at Rocky Mountain Treatment Center for an annual salary of
$36,000 and subsequently "decided to leave Rocky Mountain Treatment
Center and enter private practice." The hospital infers that the
jury must have ignored the instruction to deduct amounts Kestell
could have earned with reasonable diligence.
On the contrary, the jury clearly took into account Kestell's
testimony on interim earnings; otherwise, the award would have been
higher. Kestell's undisputed testimony was that his annual
earnings at the hospital, including bonuses and fringe benefits,
would have totalled $57,600. He testified that Rocky Mountain
Treatment Center paid him $3,000 per month until the end of 1990,
then reduced his hours and paid him approximately $2,500 per month
until April 1991, when he was laid off. During his first year in
private practice, Kestell testified, he made "two or three thousand
dollars, something like that," and by the time of the trial in
December 1992, approximately $1,800 a month. He expected to make
$25,000 annually by the end of 1993. Presumably the jury took this
testimony into account, for it reduced the maximum award allowed by
the Act, i.e., $230,400, or $57,600 for each of four years, and

18
awarded only $123,600.
The Act provides that the trier of fact has discretion to
determine the amount of lost wages and benefits, not to exceed four
years from date of discharge. Weber v. State (1992), 253 Mont.
148, 153, 831 P.2d1359, 1362. Here, the hospital has presented no
evidence that the jury abused its discretion. We conclude that the
damage award was not excessive as a matter of law.
Affirmed.

We concur.':

dLs&gF-

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