Summary
In Schmid, Judge Montgomery decided on summary judgment that the reasonableness of a Miller-Shugart settlement raised "genuine issues of material facts," and cited Alton M. Johnson in passing for the principle that reasonableness was "to be decided by the court as the factfinder."
Summary of this case from In re RFC & RESCAP Liquidating Tr. ActionOpinion
Civil No. 98-2355 ADM/AJB.
December 19, 2001
David E. Wandling, Esq., and Christopher W. Fowlkes, Esq., Wandling Rugara Fowlkes, P.L.L.P., Minneapolis, Minnesota, appeared for and on behalf of the Plaintiff.
Robert E. Salmon, Esq., and Melissa Dosick Riethof, Esq., Meagher Geer, P.L.L.P., Minneapolis, Minnesota, appeared for and on behalf of the Defendant.
MEMORANDUM OPINION AND ORDER I. INTRODUCTION
On October 17, 2001, the undersigned United States District Judge heard Defendant Fireman's Fund Insurance Co., Inc.'s, ("Defendant") Motion for Summary Judgment [Doc. No. 66]. Defendant seeks summary judgment and a finding that the Miller-Shugart agreement reached in this case is unreasonable as a matter of law. For the reasons articulated below, the Defendant's Motion is denied.
A classic Miller-Shugart settlement occurs where an insurer has denied all coverage to its insured and the abandoned insured then agrees with the claimant that judgment be entered against the insured for a certain sum in exchange for the claimant releasing the insured of any personal liability and agreeing to satisfy the resulting judgment solely from pursuit of the insurer. Id.See, e.g., Buysse v. Baumann-Furrie Co., 481 N.W.2d 27, 29 (Minn. 1992).
As required in the summary judgment context, the facts are reviewed in the light most favorable to Plaintiff.
Plaintiff is trustee of the heirs and next of kin of Robert Schmid ("Schmid"), who died of carbon monoxide poisoning in a basement room at the Sunshine Factory Restaurant and Bistro ("Sunshine Factory") in New Hope, Minnesota. Schmid was an employee of the Sunshine Factory, owned and operated by Rosengren Associates ("Rosengren"). Defendant is Rosengren's commercial general liability insurance carrier.
On January 17, 1997, Schmid drank three whiskey-Seven highballs at the Sunshine Factory's bar after he finished his shift at 3:28 p.m. See Rosengren Dep., at 121; Salmon Aff. Ex. 13. Schmid later closed his bar tab and called his housemate to ask for a ride home. Before the housemate arrived, Schmid went into the restaurant's boiler room in the basement. When his ride arrived at the Sunshine Factory, Schmid could not be located. He was found dead two days later by a Sunshine Factory employee. An autopsy report found an extremely high level of carbon monoxide in Schmid's blood and determined the cause of death to be carbon monoxide poisoning. It is undisputed that Schmid died from carbon monoxide generated by a hot water heater. Why Schmid went to the boiler room that night remains without explanation.
On January 19, 1997, the day Schmid's body was found, officials from the local gas company and the New Hope Fire and Police Departments conducted tests of equipment in the boiler room. The room contained two water heaters, one manufactured by Rheem and one manufactured by A.O. Smith.
The officials determined that the Rheem heater was malfunctioning because it was producing nearly 250 times the amount of carbon monoxide as the A.O. Smith heater. The duct work for the Rheem exhaust system was severely corroded and deteriorated, which contributed to carbon monoxide build-up in the boiler room. The Rheem heater was replaced and removed from the premises.
The Rheem water heater was later taken to the facilities of Crane Engineering, where expert witnesses retained by the heater's manufacturer inspected it. See Naeve Aff. ¶ 6. The experts conducted tests to determine the heater's carbon monoxide output. During a test conducted January 12, 1999, the water heater produced and maintained a maximum carbon monoxide output of 3,408 p.p.m. after five minutes of continuous operation. See id. ¶ 12. Such an output can result in death in less than one hour.
In a second test, conducted April 8, 1999, the heater again produced carbon monoxide levels in excess of 3,000 p.p.m. See id. ¶ 15. The experts attempted to isolate the source of the excessive output, and focused on the heater's burner pan. During the testing, the experts observed "flame rollout," in which fire rolled out from under the water heater's combustion chamber and onto the heater's outside shell. See id. ¶ 16. The experts attributed the flame rollout to the deformed burner pan, which could not be properly positioned below the rectangular opening of the combustion chamber. See id. ¶ 17. Because of the pan's corrosion and deformed condition, it was resting about three inches from its intended position. Id. The experts concluded that the flames, when not properly contained within the combustion chamber, were cooled by contact with the metal bottom of the water heater, which significantly contributed to the high levels of carbon monoxide output. See id. ¶ 19. The experts moved the pan around and discovered that carbon monoxide levels decreased as it was more closely aligned to its designed position underneath the combustion chamber. See id. ¶ 20.
In August, 1998, Plaintiff commenced a wrongful death lawsuit against Rheem Manufacturing Co. (manufacturer), Gavic Sons Plumbing (installer), and Sunshine Factory. See Salmon Aff. Ex. 15 (Compl.). Plaintiff later added Northland Mechanical Contractors ("Northland") as a defendant. See id. Ex. 16 (Am. Compl.). Plaintiff's Complaint alleged that Rheem negligently and defectively designed and manufactured the water heater, and failed to warn of the dangers associated with operating it. Plaintiff alleged that Gavic Sons improperly and negligently installed and maintained the water heater. Plaintiff also alleged that Northland negligently installed and maintained the water heater and ventilation system. Plaintiff alleged that Sunshine Factory "negligently and wrongfully failed to maintain a premises which was safe for its patrons, employees, and other individuals." Id. ¶ 42.
Rosengren, as owner and operator of the Sunshine Factory, tendered the defense of the lawsuit to Defendant. Defendant denied coverage based on the insurance policy's pollution exclusion. See Salmon Aff. Ex. 14. Sunshine Factory was left to defend itself. In August, 1999, Plaintiff and Sunshine Factory entered into a settlement agreement for $450,000 in accordance with Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982). See Salmon Aff. Ex. 35 (settlement agreement). The Miller-Shugart agreement released Sunshine Factory from any liability. Id. Sunshine Factory also agreed to pay Plaintiff $15,000 as a loan, without interest, on the condition that it would be repaid if Plaintiff recovered more than $250,000 from Defendant. Id. ¶ 6.
Plaintiff also entered into settlement agreements with the other defendants in accordance with Pierringer v. Hoger, 124 N.W.2d 106 (Wis. 1963). Plaintiff settled with Gavic Sons Plumbing for $48,000. See Salmon Aff. Ex. 34. Plaintiff agreed to a settlement with Northland for $20,000. See id. Ex. 33. Plaintiff settled with Rheem for the nominal amount of $270. See id. Ex. 32. The Gavic and Northland agreements included a clause that allowed them to recover their payments, by Plaintiff repaying them for each dollar above $200,000 or $250,000 Plaintiff recovered from Defendant. See id. Exs. 33, 34.
Gavic Sons Plumbing settlement agreement. Id.See Salmon Aff. Ex. 34.
Northland settlement agreement. Id. See Salmon Aff. Ex. 33.
Initially, Sunshine Factory brought this lawsuit as a declaratory judgment action against Defendant to resolve insurance coverage issues. Plaintiff Delores Schmid was substituted for Sunshine Factory as Plaintiff in this action after they entered into the Miller-Shugart agreement. The insurance coverage issues were resolved later in favor of Plaintiff. Defendant now challenges the reasonableness of the Miller-Shugart settlement agreement.
On May 30, 2000, Plaintiff's Motion for Summary Judgment was granted and Defendant's Motion for Summary Judgment was denied. Id. See Schmid v. Fireman's Fund Ins. Co., 97 F. Supp.2d 967 (D.Minn. 2000). This Court held that Defendant was required to provide coverage to Sunshine Factory for Schmid's death because of the "hostile fire" exception to the pollution exclusion. Id. at 973.
III. DISCUSSION
Federal Rule of Civil Procedure 56(c) provides that summary judgment shall issue "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c);see Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp. 475 U.S. 574 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986); Celotex Corp. v. Catrett, 477 U.S. 317 (1986). The movant has the burden of showing that no genuine issue of material fact exists. Id. See Celotex, 477 U.S. at 323. Once the movant meets its burden, the party opposing the motion may not rest upon mere allegations or denials, but "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). The mere existence of a "scintilla of evidence" in support of the non-movant's position is insufficient; there must be evidence on which a jury could reasonably find for the non-movant.Anderson, 477 U.S. at 252. The non-movant "must do more than simply show that there is some metaphysical doubt as to the material facts."Matsushita, 475 U.S. at 586.
The Minnesota Supreme Court has approved a settlement method in which an insured, whose insurer has denied coverage, stipulates to a money judgment in favor of a plaintiff, the plaintiff releases the insured from personal liability, and the plaintiff agrees to satisfy the judgment by seeking coverage from the insurer. Id. See Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982). Such a Miller-Shugart settlement agreement is enforceable against the insurer if (1) the insurer receives notice of the agreement; (2) the agreement is reasonable and prudent; and (3) the agreement is not the result of fraud or collusion. See id. at 733-35; Brownsdale Co-op. Ass'n. v. Home Ins. Co., 473 N.W.2d 339, 341 (Minn.App. 1991). Here, there is no dispute that Defendant received timely notice of the settlement negotiations and an opportunity to participate.
Collusion, for purposes of a Miller-Shugart settlement, is a lack of opposition between a plaintiff and an insured that otherwise would ensure that the settlement is the result of adversarial bargaining.Id. See Sargent v. Johnson, 551 F.2d 221, 232 (8th Cir. 1977). Reasonableness and collusion are not readily separable issues.Independent Sch. Dist. No. 197 v. Accident Cas. Ins., 525 N.W.2d 600, 607 (Minn.App. 1995); see Koehnen v. Herald Fire Ins. Co., 89 F.3d 525, 529 (8th Cir. 1996). However, the settlement agreement is not the product of fraud and collusion simply because Defendant believes that the amount agreed upon is not reasonable and prudent. Id. See McNicholes v. Subotnik, 12 F.3d 105, 109 (8th Cir. 1993). Here, Defendant has failed to plead with particularity facts supporting allegations of fraud and collusion. Id. See Miller, 316 N.W.2d at 734.
A Miller-Shugart settlement is not a typical arm's-length transaction. Whether a Miller-Shugart settlement agreement is reasonable and prudent is an issue of fact to be decided by the court as the factfinder.Id. See Alton M. Johnson Co. v. M.A.I. Co., 463 N.W.2d 277, 279 (Minn. 1990). Where the Miller-Shugart settlement is reached before trial, the burden of proof is on the plaintiff to establish the reasonableness of the agreement amount. See Traver v. Farm Bureau Mut. Ins. Co., 418 N.W.2d 727, 732 (Minn.App. 1988); Miller, 316 N.W.2d at 735. The reasonableness inquiry in this case depends on whether a reasonably prudent person in Sunshine Factory's position would pay $450,000 after taking into consideration the merits of the claim against it, the evidence regarding liability and damages, and the risks of proceeding to trial. See Alton M. Johnson Co., 463 N.W.2d at 279 (holding that settlement is reasonable and prudent if a reasonably prudent person in defendant's position would have accepted it after considering facts regarding liability and damages, and the risks of going to trial) (citingMiller, 316 N.W.2d at 736). There are genuine issues of material fact regarding the reasonableness issue. The parties disagree about the risks Sunshine Factory faced in going to trial. It cannot be said that this settlement amount is unreasonable as a matter of law. Plaintiff presented an expert opinion that a jury award to compensate for the death of Robert Schmid could be anticipated in the range of $1,000,000 to $2,000,000. See Schwebel Aff., at 6. Schmid, a bachelor aged 36, was survived by his mother, father, three sisters and two brothers. Akin to the situation at hand, in the case of Winkel v. State Farm Ins., a jury awarded $1,370,000, for an unmarried 27 year old man survived by his parents and one younger sister. Id. See James Winkel, as trustee for the next-of-kin of Steven J. Winkel v. State Farm Ins., No. 91-10822 (Hennepin County. Dist. Ct. June 2, 2000); see also Donald A. Carlson, as trustee for the next-of-kin of Jeffrey J. Carlson v. State Farm Ins., No. 91-10822 (Hennepin County. Dist. Ct. June 2, 2000) ($1,370,000 jury award for single, 23 year old man with no dependents and little direct economic value to the next-of-kin). As the number of surviving relatives increase, the likelihood of a higher jury award increases. See Schwebel Aff., at 5. Plaintiff's expert also opined that a jury would attribute 50% or more of the negligence to Sunshine Factory under the circumstances. See id. at 7. Based on this expert's opinion on damages and potential liability, Sunshine Factory faced significant risks if this case proceeded to trial.
If an unreasonable settlement is held unenforceable, the underlying tort claim is reinstated for trial. Id. See Alton M. Johnson Co., 463 N.W.2d at 280.
Although the disclosure of James Schwebel as an expert on May 7, 2001, was untimely, Defendant suffered no prejudice as a result. Defendant had an adequate opportunity to prepare and did not premise its summary judgment motion on the lack of expert opinion. Accordingly, the Schwebel Affidavit may be used because Plaintiff's failure to disclose was not prejudicial.
Plaintiff's mechanical engineering expert investigated the incident and examined the water heater at issue. See Naeve Aff. ¶ 5. Based on his prior experience as an expert witness in wrongful death trials involving carbon monoxide, and his investigation and testing of the water heater in this case, the expert reached conclusions on the relative fault of the various potential defendants. See Naeve Suppl. Aff. ¶¶ 4, 5. The expert found no basis for attributing fault to Rheem because there was no evidence that Rheem improperly designed or manufactured the water heater. Id. ¶ 6. The expert found very little fault attributable to Northland because the installation was appropriate and complied with applicable building codes. Id. ¶ 8. Accordingly, he estimated Northland's fault percentage to be in the range of 0%-10%. Id.
As a mechanical engineer, Keith Naeve is qualified to provide an opinion on the causes of the water heater's production of carbon monoxide. His opinion on causation is arguably interconnected with the question of which entity would have been responsible for the defective condition. The value of his opinion on relative fault is a matter of weight rather than the admissibility of his testimony.
The expert noted that, although Gavic Sons was the only party Sunshine Factory could identify as having been present in the boiler room during the two years preceding Schmid's death, there was no evidence Gavic Sons had been requested to perform any maintenance on the Rheem water heater at issue. Id. ¶ 9. Gavic Sons had performed work on the other water heater. Id. There is no evidence Gavic Sons played any role in maintaining the Rheem water heater. Nevertheless, the expert opined that a jury could potentially impute some fault to Gavic Sons based on a failure to identify and warn against the condition of the Rheem water heater. Id. ¶ 10. The expert concluded that a jury could find Gavic Sons 0%-20% responsible. Id. ¶ 11.
Sunshine Factory had a duty to use reasonable care in the maintenance of the conditions on its premises for the safety of its employees and other invitees. Id. See Bisher v. Homart Dev. Co., 328 N.W.2d 731, 733 (Minn. 1983); Peterson v. Balach, 199 N.W.2d 639, 647 (Minn. 1972). Sunshine Factory admitted it has no evidence indicating it performed any routine service or maintenance on the Rheem water heater. The expert observed that the corroded and deformed burner pan was improperly positioned below the opening of the combustion chamber. The expert opined that the burner pan had been deformed as a result of an accidental strike or kick. Id. ¶ 13. The expert's opinion was that the production of carbon monoxide was attributable to Sunshine Factory's failure to properly maintain the water heater. Id. ¶¶ 6, 12-14. He estimated that a jury may attribute 70%-100% fault to Sunshine Factory. Id. ¶ 16.
Defendant argues that the Miller-Shugart settlement agreement is unreasonable as a matter of law. Defendant presents expert opinion testimony that the total jury damage award would likely fall in the range of $100,000 to $300,000. See Salmon Aff. Ex. 39, at 2. Defendant's expert also opined that Sunshine Factory's percentage of fault would be as low as 10%. Id. at 3. The parties have widely differing views of Sunshine Factory's liability exposure in this case and its risks of proceeding to trial. Thus, there are genuine issues of material fact regarding the reasonableness of the Miller-Shugart settlement agreement. It is not unreasonable as a matter of law.
IV. CONCLUSION
Based upon the foregoing, and all of the files, records and proceedings herein, IT IS HEREBY ORDERED that Defendant's Motion for Summary Judgment [Doc. No. 66] is DENIED.