Wood v.Milionis Constr., Inc. ( 2021 )

FILE
THIS OPINION WAS FILED
FOR RECORD AT 8 A.M. ON
AUGUST 5, 2021
IN CLERK’S OFFICE
SUPREME COURT, STATE OF WASHINGTON
AUGUST 5, 2021
ERIN L. LENNON
SUPREME COURT CLERK
IN THE SUPREME COURT OF THE STATE OF WASHINGTON
JEFFREY WOOD and ANNA WOOD,
husband and wife,
Petitioners,
v. NO. 98791-2
MILIONIS CONSTRUCTION, INC., a
Washington corporation; STEPHEN
MILIONIS, an individual,
Defendants,
CINCINNATI SPECIALTY Filed: August 5, 2021
UNDERWRITERS INSURANCE
COMPANY, an insurance corporation,
Respondent.
STEPHENS, J.—This case involves the familiar “covenant judgment”
arrangement, in which an insured defendant, facing suit by a plaintiff, settles claims
without the insurer’s consent in exchange for a release from liability and assignment of
potential bad faith claims against the insurer to the plaintiff. If the trial court deems the
settlement reasonable, that settlement amount becomes the presumptive measure of
Wood v. Milionis Constr., Inc. et al., No. 98791-2
damages in the later bad faith action brought by the plaintiff against the insurer. Bird
v. Best Plumbing Grp., LLC, 175 Wn.2d 756, 761, 287 P.3d 551 (2012).
Here, the insurer, Cincinnati Specialty Underwriters (Cincinnati), challenges the
trial court’s order approving as reasonable a $1.7 million settlement between the
plaintiffs, Anna and Jeffrey Wood (Woods), and Cincinnati’s insureds, Milionis
Construction Inc. (MCI) and Stephen Milionis. A divided Court of Appeals panel held
the trial court abused its discretion because the reasonableness finding credited a
defense expert’s evaluation of contract damages at $1.2 million despite other evidence
in the record suggesting the defense’s evaluation of damages never rose above
$399,000.
We reverse the Court of Appeals and reinstate the trial court’s order. The trial
court properly conducted the reasonableness hearing and evaluated the varied and
conflicting evidence of contract damages. In addition, the court appropriately
considered damages for the plaintiffs’ extracontractual claims as well as allowable
attorney fees. In finding an abuse of discretion, the Court of Appeals majority
misapprehended parts of the record and substituted its assessment of the competing
damages evaluations for the trial court’s assessment. We also hold the trial court acted
within its discretion in denying Cincinnati’s request for a continuance and additional
discovery.
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RELEVANT FACTS
As the Court of Appeals dissenting judge aptly observed, this case is about a
“dream house turned into a nightmare.” Wood v. Milionis Constr., Inc., No. 36286-
8-III, slip op. dissent at 1 (Wash. Ct. App. Apr. 28, 2020) (Fearing, J., dissenting),
https://www.courts.wa.gov/opinions/pdf/362868_unp.pdf. The Woods and MCI
executed a contract in July 2015 for the construction of a single-family residence in
Newman Lake, Washington. As general contractor, MCI assumed responsibility for
the management, supervision, and administration of construction. The original
contract price for completion of the home was $1,356,000. Following several issues
with faulty workmanship, construction ceased on the home in November 2016, at
which point the Woods had paid about $570,000 of the original contract price to
MCI. The house remained “substantially incomplete” with portions of the home
“open to the elements going into the winter months.” Clerk’s Papers (CP) at 10,
500. Additionally, negligent and defective work created multiple structural defects.
The Woods sued MCI and Stephen Milionis on November 18, 2016. 1 The
Woods claimed breach of contract; unjust enrichment; promissory estoppel; breach
of contractual duties of good faith and fair dealing; negligence; negligent
1
MCI’s insurer in this case, Cincinnati, was also listed as a defendant in the case title for
the complaint as well as the later stipulated judgment. Cincinnati accurately notes it was
not a party to this case until its motion to intervene was granted. CP at 173, 638-41.
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representation; violation of the Consumer Protect Act (CPA), ch.19.86 RCW; and
bond recovery. MCI’s general liability insurer, Cincinnati, retained attorney Shane
McFetridge to represent MCI and Milionis but reserved the right to deny or limit
coverage. MCI and Milionis also retained personal defense counsel, Brook
Cunningham. Pursuant to the construction contract, the parties agreed to engage in
mediation and, if necessary, arbitration.
Initial Expert Evaluation of Damages
After the Woods filed suit, all parties hired experts to evaluate the structural
defects and cost to complete the Woods’ home. Their calculations varied
significantly. Plaintiffs’ expert Andy Smith estimated the cost to remedy all alleged
defects at $761,234.09 and the cost to complete the home at $1,941,965.02 for a total
cost of over $2.7 million, not including general and consequential damages for the
Woods’ other claims. In contrast, defense expert Nick Barnes estimated the cost to
repair the alleged defects at $540,341.76 and the cost to complete construction at
$674,292.19 for a total of approximately $1.2 million. Barnes’s estimate for the cost
to complete construction was never incorporated into the defense’s calculations for
liability because the parties’ contract indicated the Woods were entitled to such costs
only if “the cost to complete the work . . . exceeds the contract price.” CP at 423-
24. McFetridge, Cincinnati’s retained counsel for MCI and Milionis, noted that
“[w]ith $807,135.97 remaining on the contract, our experts believe that there should
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be sufficient funds remaining to complete construction of the home without regard
to the construction defects.” Id. at 424. Based on Barnes’s calculations, another
defense expert, Scott Buckles, analyzed the projected liability against MCI and
Milionis to remedy only certain defects, but he did not discuss damages for the cost
to complete the project. Buckles believed the defendants bore 65 percent liability
for some, but not all, of the alleged defects for a total cost of $146,102.18.
Unsuccessful Mediations
The parties participated in three unsuccessful mediations over the course of a
year. Cincinnati remained involved in all three mediations and participated in
significant discovery through at least October 2017. The Woods allege the highest
settlement authority Cincinnati ever provided defense counsel at the three
mediations—$60,000.00—was “less than twenty percent . . . of the recommended
settlement authority sought by its counsel.” Id. at 42. Prior to the third mediation
in October 2017, McFetridge requested settlement authority of $350,000.00 based
on defense expert Buckles’s evaluation of damages and estimated attorney fees.
Cincinnati did not supply McFetridge with that requested authority. Nevertheless,
the parties tentatively agreed to settle the case in favor of the Woods for $399,514.58.
The settlement was contingent on Cincinnati agreeing to fund the settlement, which
it never did.
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After the third mediation, McFetridge told Cincinnati, “I think we negotiated
the best deal we possibly could given all of the issues in the case,” and he
recommended Cincinnati fund the settlement. Id. at 420. McFetridge noted the
nearly $400,000 settlement reflected the mediator-appointed-contractor’s
recommended damages amount of approximately $374,000, plus $25,000 for repairs
already paid by the Woods.2 Despite McFetridge’s recommendation, Cincinnati
refused to fully fund the settlement based on its belief that MCI’s insurance policy
did not cover the damages alleged in the Woods’ lawsuit. Cincinnati did increase
the settlement authority from $60,000 to $100,000 and stated that if this offer was
not accepted, Cincinnati would proceed with a declaratory judgment action in federal
district court to determine coverage issues between MCI and Cincinnati. The Woods
declined the $100,000 settlement offer, and the parties set an arbitration date for May
29, 2018.
Federal District Court Declaratory Action
Three months before the scheduled arbitration, Cincinnati moved for
summary judgment in federal district court, requesting a declaration that Cincinnati
“has no obligation to defend or indemnify [MCI] in the Underlying Suit, based upon
2
The mediator-appointed general contractor, Paul Shelton, estimated the cost to repair
defects at $562,327.12, but this number was reduced at settlement based on MCI’s claim
that the Woods owed MCI $200,000.00 for a draw and for unpaid change order work. CP
at 419-20.
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two undisputed coverage limitations in Cincinnati’s policy.” Id. at 469.
Specifically, Cincinnati argued the “your work” exclusion barred coverage “for
damage to [MCI’s] own work” and that the Independent Contractors Limitation
Endorsement barred coverage “for [MCI’s] derivative liability for subcontracted
work [in the event MCI failed to verify the subcontractors’ liability insurance].” Id.
The federal district court denied the motion and held Cincinnati had a duty to defend
MCI in the underlying suit with the Woods. The court also determined questions of
fact precluded summary judgment on Cincinnati’s duty to indemnify given that the
“underlying suit has not yet concluded.” Id. at 595.3
Additional Liability Estimates and Expert Reports
Following the failed mediations, but before arbitration, McFetridge learned
that the Woods had spent around $200,000.00 to repair certain defects. He notified
Cincinnati that the Woods could recover as much as $526,102.18 based on the
amount they spent on repairs, the calculations of defense expert Buckles, and
projected attorney fees. McFetridge indicated the potential net recovery jumped to
$1.14 million when based on a portion of plaintiffs’ expert Smith’s calculations.
These higher estimates still did not include any calculation of liability for the
3
As of this writing, the bad faith claim against Cincinnati has yet to be resolved by the
federal district court, and issues relating to that claim are not before us.
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Woods’ extracontractual claims. McFetridge continued to recommend Cincinnati
fund the $399,000.00 settlement reached at the third mediation.
In the months leading up to arbitration, the parties conducted additional
discovery, including the depositions of Anna Wood and structural engineer Brian
Hanson as well as an expert report by plaintiffs’ forensic accountant, Kemper Rojas.
The report revealed that MCI tried to overcharge the Woods by $302,264.84 and that
MCI owed the Woods reimbursement in the amount of $121,497.04. The report also
noted that only part of MCI’s invoice detail was recorded in its accounting file, with
$297,233.00 absent from invoicing and no sales tax recorded or collected on those
charges. McFetridge planned to dispute the validity of this report based on the
testimony of defense expert Renee Grandinetti at arbitration. McFetridge also filed
a motion for partial summary judgment asking the arbitrator to dismiss all of the
Woods’ claims except for their breach of contract claim. The Woods dispute
whether this motion would have been considered. In any case, the motion was never
resolved because the parties settled shortly before the scheduled arbitration.
Covenant Judgment Agreement
One week before arbitration, MCI and Milionis’s personal counsel,
Cunningham, e-mailed McFetridge to notify him a settlement was reached with the
Woods, thereby canceling the upcoming arbitration. McFetridge confirmed he was
not included in the negotiations that led to that particular settlement. The Woods,
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MCI, and Milionis formally executed a settlement agreement and covenant not to
execute a few weeks later. Specifically, the parties stipulated to a judgment of $1.7
million to the Woods and agreed to release their claims against one another, MCI
assigned all of its rights and claims against Cincinnati to the Woods, and the Woods
agreed not to collect the stipulated judgment against MCI or Milionis.
PROCEDURAL HISTORY
The parties filed a joint motion in Spokane County Superior Court for entry
of the stipulated judgment on June 29, 2018. In support of the motion, the parties
included the declaration of plaintiffs’ expert Smith who reaffirmed his estimated cost
to remedy the defects and complete the project at over $2.7 million. The Woods also
filed individual declarations to highlight the emotional distress they both suffered as
well as the business losses “of no less than $900,000” Jeffrey Wood incurred from
having to take time to deal with the property damage caused “by the actions and
omissions by [MCI].” Id. at 66-67. The court scheduled a reasonableness hearing
under RCW 4.22.060 for July 13, 2018.
Motion To Intervene and Conduct Discovery
Several days before the reasonableness hearing, Cincinnati filed a nonparty
motion to intervene. In a supplemental declaration, counsel for Cincinnati noted it
did not receive a copy of the settlement agreement between the Woods and MCI
until July 6. Cincinnati requested time to conduct discovery related to the proposed
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$1.7 million stipulated judgment and to continue the reasonableness hearing until
that discovery concluded. The Woods did not oppose intervention by Cincinnati but
argued “a continuance is not warranted . . . and the requested discovery is
unnecessary, immaterial and inappropriate.” Id. at 210. The trial court granted
Cincinnati’s motion to intervene but denied its request for a continuance and
additional discovery, remarking that “[a]ll of the discovery that you’re requesting
isn’t really going to the reasonableness of the settlement.” Verbatim Report of
Proceedings (VRP) at 47. The trial court also determined that the notice provided
was sufficient for purposes of Cincinnati’s ability to argue the settlement was not
reasonable.
The Reasonableness Hearing
The reasonableness hearing occurred over two days in July 2018. Prior to the
second day of the hearing, Cincinnati submitted new pleadings and 14 exhibits to
oppose the reasonableness of the settlement. Cincinnati argued the real settlement
value of the case was the $399,000 figure reached at the third mediation in October
2017. In reply, the Woods argued their damages exceeded $2 million, noting
liability was undisputed, MCI was not judgment proof, and the investigation and
preparation of the case was extensive. The Woods moved to strike Cincinnati’s
filings as untimely and overlength. The trial court denied the motion to strike and
considered Cincinnati’s pleadings and exhibits.
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During the reasonableness hearing, the court heard testimony from
McFetridge, who discussed his representation of MCI and Milionis, his own
calculation of damages, and his interactions with Cincinnati. McFetridge confirmed
that Cincinnati hired him to represent its insureds and that he did not represent
Cincinnati. He remarked that he mainly relied on defense experts Barnes’s and
Buckles’s reports and that his evaluation of the case reflected what he believed “the
case possibly could settle for and what [the defense] should consider settling for.”
Id. at 72. Noting that he had previously experienced insurance companies offering
less settlement authority than he requested, McFetridge testified such an occurrence
was rare. McFetridge confirmed he provided an estimate for a net award of $1.14
million to the Woods based on the plaintiffs’ expert reports, noting that estimate was
not a “worst case evaluation” but a “potential range of exposure . . . based on what I
kn[ew] at the time.” Id. at 80. McFetridge also explained he filed a motion for
partial summary judgment to be considered at arbitration, despite the Woods arguing
such motions were not allowed under “triple A” arbitration rules, because he had
previously filed similar motions that were at least considered at arbitration.
On the second day of the hearing, Cincinnati asked McFetridge to clarify
“how the defense expert came up with a number of $1.2 million for the plaintiffs’
damages.” Id. at 103. Defense expert Barnes estimated the total cost for repairing
alleged defects and completing construction at approximately $1.2 million.
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McFetridge remarked he did not account for the latter estimate (the cost to complete
construction) based on his own understanding that the home could be finished within
the contract price under the contract terms allocating damages for breach. On cross-
examination, he conceded that defense expert Buckles “agrees that some
responsibility []lies with [MCI].” Id. at 112-13. McFetridge also conceded he did
not account for consequential or general damages in his supplemental case
assessment prior to the third mediation. The trial court asked McFetridge if his
recommendation for settlement authority went up between November 2016 and May
2018, and he confirmed his recommendation did eventually go up to $399,000. He
clarified that he did not ask for further settlement authority once he knew Cincinnati
was not willing to fund even that amount. The trial court asked when McFetridge
received the $1.2 million figure from the defense expert, and he stated he did not
“recall ever getting a number from [defense expert Barnes] that was $1.2 million”
because the numbers from Barnes were just a “general contracting cost estimator to
prove what [Barnes] would . . . do the project for.” Id. at 121.
At the end of the hearing, the trial court observed:
When you look at . . . Mr. Milionis and the liability to
the corporation and the officers of the corporation and the
damages, I look at it in October, but since [the] October
[mediation], [the parties] did a lot more negotiations. They did
depositions. You got experts involved on the defense side, too,
that gave a lot higher numbers than the $399,000 that happened
in October.
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Id. at 141. The trial court considered the facts in light of the applicable Chaussee
factors 4 and determined the $1.7 million settlement was reasonable; the court
granted the motion to enter the stipulated judgment.
Court of Appeals Decision and Subsequent Procedural History
In a 2-1 unpublished opinion, the Court of Appeals reversed the trial court’s
reasonableness determination based on what it described as a “significant
discrepancy” between the defense evaluation of damages at under $350,000 and the
trial court’s belief that certain defense experts valued the case at $1.2 million. Wood,
slip op. at 1-2. The dissenting judge criticized the majority for misunderstanding the
various evaluations and substituting its own judgment for the trial court’s. Id. dissent
at 27 (Fearing J., dissenting). The Woods petitioned this court for review, which we
granted. Wood v. Cincinnati Specialty Underwriters Ins. Co., 196 Wn.2d 1017, 474
P.3d 1053 (2020). We accepted an amici brief from the American Property Casualty
4
The Chaussee factors originate from the Court of Appeals case Chaussee v. Maryland
Casualty Co., 60 Wn. App. 504, 803 P.2d 1339 (1991). Courts apply the factors in
determining whether a settlement with a covenant not to execute is reasonable. The factors
include (1) the releasing person’s damages, (2) the merits of the releasing person’s liability
theory, (3) the merits of the released person’s defense theory, (4) the released person’s
relative faults, (5) the risks and expenses of continued litigation, (6) the released person’s
ability to pay, (7) any evidence of bad faith, collusion, or fraud, (8) the extent of the
releasing person’s investigation and preparation of the case, and (9) the interests of the
parties not being released. Id. at 511-12. Application of the Chaussee factors is discussed
in the analysis below.
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Insurance Association and the National Association of Mutual Insurance Companies
(APCIA et al.).
ANALYSIS
Appellate courts review a trial court’s determination that a settlement is
reasonable for an abuse of discretion. Bird, 175 Wn.2d at 774. An abuse of
discretion occurs where “the ‘decision is manifestly unreasonable or is based on
untenable grounds or untenable reasons.’” Id. at 774-75 (quoting Water’s Edge
Homeowners Ass’n v. Water’s Edge Assocs., 152 Wn. App. 572, 584, 216 P.3d 1110(2009)). A “reviewing court may not find abuse of discretion simply because it
would have decided the case differently—it must be convinced that ‘no reasonable
person would take the view adopted by the trial court.’” Gilmore v. Jefferson County
Pub. Transp. Benefit Area, 190 Wn.2d 483, 494, 415 P.3d 212 (2018) (internal
quotation marks omitted) (quoting State v. Salgado-Mendoza, 189 Wn.2d 420, 427,
403 P.3d 45 (2017)) (internal citations omitted)). Here, the trial court did not abuse
its discretion; it properly applied the appropriate criteria to determine the settlement
reached was reasonable. The Court of Appeals departed from the deferential
standard of review when it reversed the trial court’s well-supported decision based
on its own mistaken assessment of the damages in this case. We therefore reverse
the Court of Appeals and reinstate the trial court’s order.
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We also reverse the Court of Appeals “suggestion” that the trial court should,
on remand, grant Cincinnati’s request for additional discovery. Absent any finding
of error, this directive was unwarranted. The trial court acted within its discretion
in denying Cincinnati’s motion for a continuance and additional discovery.
I. Background on Covenant Judgments and Reasonableness Hearings under
RCW 4.22.060
This court has long recognized the ability of an insured defendant facing claims
by a plaintiff to independently negotiate a settlement where the insurer declines to settle.
Evans v. Cont’l Cas. Co., 40 Wn.2d 614, 627-28, 245 P.2d 470 (1952). Typically, this
process involves the insured defendant entering into a settlement agreement with the
plaintiff in exchange for a covenant not to execute the judgment against it and
assignment of potential bad faith claims against its insurer. Besel v. Viking Ins. Co. of
Wisc. 146 Wn.2d 730, 736, 49 P.3d 887 (2002); see also Safeco Ins. Co. of Am. v.
Butler, 118 Wn.2d 383, 398-400, 823 P.2d 499 (1992). Because a covenant
judgment presents the potential for fraud or collusion between the settling parties,
the settlement is subject to a reasonableness hearing in superior court pursuant to
RCW 4.22.060(1). Besel, 146 Wn.2d at 738-39.
RCW 4.22.060 was enacted as part of the tort reform act of 1981, mainly “to
provide a means to allocate liability among joint tortfeasors.” Bird, 175 Wn.2d at
766. A reasonableness hearing “under RCW 4.22.060 is an equitable proceeding to
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which no jury trial right is afforded.” Id. at 773. We have recognized nine non-
exclusive factors to help guide courts in determining whether a settlement is
reasonable:
“[T]he releasing person’s damages; the merits of the releasing
person’s liability theory; the merits of the released person’s
defense theory; the released person’s relative faults; the risks
and expenses of continued litigation; the released person’s
ability to pay; any evidence of bad faith, collusion, or fraud;
the extent of the releasing person’s investigation and
preparation of the case; and the interests of the parties not being
released.”
Glover v. Tacoma Gen. Hosp., 98 Wn.2d 708, 717, 658 P.2d 1230 (1983) (alteration
in original) (quoting brief), abrogated on other grounds by Crown Controls v.
Smiley, 110 Wn.2d 695, 756 P.2d 717 (1988).
While courts refer to these as the “Glover factors” in the joint and several
liability context, they are known as the “Chaussee factors” in the covenant judgment
context—in reference to the Court of Appeals case that first applied them in this
setting: Chaussee v. Maryland Casualty Co., 60 Wn. App. 504, 803 P.2d 1339(1991); see also Bird, 175 Wn.2d at 767 (noting this court implicitly adopted the
Chaussee factors in Besel, 146 Wn.2d at 738-39, and Mutual of Enumclaw Insurance
Co. v. T&G Construction, Inc., 165 Wn.2d 255, 264, 199 P.3d 376 (2008), and
expressly adopting application of the Chaussee factors and RCW 4.22.060 to
reasonableness hearings involving covenant judgments).
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At a hearing under RCW 4.22.060(1), “[t]he settling parties have the burden
to prove reasonableness” under the relevant factors. Bird, 175 Wn.2d at 766. If the
trial court finds a settlement reasonable, the settlement amount becomes “the
presumptive measure of an insured’s harm caused by an insurer’s tortious bad faith.”
Besel, 146 Wn.2d at 738. Further, once a settlement is found reasonable at the
covenant judgment stage, the burden shifts to the insurer to prove the settlement
resulted from fraud or collusion in the subsequent bad faith action against the insurer.
Id. at 739.
A trial court exercises discretion in applying the Chaussee factors, and “[a]ll
nine criteria will not necessarily be relevant in every case.” Id. at 739 n.2.
Reasonableness is a fact-specific inquiry. For example, the Court of Appeals upheld
a trial court’s determination that a $17.4 million covenant judgment was reasonable
“[g]iven the extent of [the plaintiff’s] injuries, [the defendant’s] clear liability, [the
defendant’s] financial situation, and the anticipated costs of future litigation.”
Howard v. Royal Specialty Underwriting, Inc., 121 Wn. App. 372, 383, 89 P.3d 265(2004). In contrast, a covenant judgment for $8.75 million was deemed
unreasonable where the insurance-appointed defense counsel “had already
successfully removed the [plaintiff’s] warranty claims . . . on summary judgment
and anticipated success in defending against most of the [plaintiff’s] remaining
claims.” Water’s Edge, 152 Wn. App. at 599. The unreasonableness of the covenant
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judgment in Water’s Edge was also influenced by the fact that the insurance-
appointed defense counsel predicted a “worst case scenario” judgment for the
plaintiff between “$250,000 and $350,000.” Id. at 588. Appellate review of a trial
court’s reasonableness determination reflects deference to the trial court’s ability to
consider all relevant facts, make credibility determinations, and evaluate competing
damages assessments, while being alert to indicia of fraud, bad faith, or collusion.
See Chaussee, 60 Wn. App. at 512; Bird, 175 Wn.2d at 766. With this background
in mind, we examine whether the trial court correctly ruled that the covenant
judgment entered here was reasonable.
II. Substantial Evidence Supports the Trial Court’s Reasonableness
Determination
Appellate courts will not disturb a trial court’s factual finding that a settlement
is reasonable “when supported by substantial evidence.” Brewer v. Fibreboard
Corp., 127 Wn.2d 512, 524, 901 P.2d 297 (1995) (plurality opinion). Here,
substantial evidence supports the trial court’s determination that the $1.7 million
covenant judgment was reasonable. 5
5
Cincinnati failed to assign error to several trial court findings supporting the
reasonableness determination, and the Court of Appeals properly regarded the findings as
verities on appeal. Robel v. Roundup Corp., 148 Wn.2d 35, 42, 59 P.3d 611 (2002). Like
the Court of Appeals, we accept as true that (1) the Woods demonstrated MCI breached
tort and contract duties owed to the Woods and that MCI proximately caused injuries to
the Woods, (2) the Woods demonstrated negligent actions and omissions by MCI
proximately caused the Woods to suffer anxiety and emotional distress, and (3) the Woods
demonstrated MCI violated the CPA, chapter 19.86 RCW. See Wood, slip op. at 17
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We consider the trial court’s determination in light of the relevant Chausee
factors. Though the court’s decision did not directly cite each of the Chaussee
factors, this is not required, as a trial court’s reasonableness determination is
sufficiently clear when “ʻthe parties addressed the factors in their briefs and the trial
court considered the briefs.’” Hidalgo v. Barker, 176 Wn. App. 527, 549, 309 P.3d
687 (2013) (quoting Water’s Edge, 152 Wn. App. at 585). Both the Woods and
Cincinnati addressed the Chaussee factors in their briefs. See CP at 608-611
(wherein the Woods argue that their expert’s testimony supported damages of over
$2 million, that MCI had no defense against consequential and general damages, and
that the Woods “committed significant resources and effort to investigation and
preparation of their case”); see also id. at 445-55 (wherein Cincinnati argues that
MCI was potentially “judgment proof,” that the settlement number was “artificially
inflated,” and that some of the Woods’ claims likely would have been dismissed on
summary judgment).
At the reasonableness hearing, the trial court analyzed the applicability of the
relevant Chaussee factors in its oral remarks. The key disputed factors went to
(quoting CP at 650-51). We observe, however, that accepting these unchallenged findings
as verities on appeal does not preclude Cincinnati’s challenge to the reasonableness of the
$1.7 million settlement amount, recognizing that reasonableness is the ultimate question
and Cincinnati’s challenge was “abundantly clear.” Id. at 18 n.8 (citing Spokane Sch. Dist.
No. 81 v. Spokane Educ. Ass’n, 182 Wn. App. 291, 299 n.2, 331 P.3d 60 (2014)).
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damages, liability and defenses to liability, the defendants’ ability to pay, and
evidence of bad faith, fraud, or collusion. The trial court properly addressed each of
these, as well as the remaining factors, to support its ruling.6
A. Releasing Person’s Damages
The trial court evaluated the competing estimates of the Woods’ damages at
the reasonableness hearing. The court noted that the $399,000 settlement in October
served as a starting point but remarked that “since October, [the parties] did a lot
more negotiations . . . [and] depositions” and that certain defense experts had placed
damages above $399,000. VRP at 141. Defense expert Barnes estimated the cost
to repair deficiencies at $540,000 and the cost to complete the project at $674,000.
McFetridge acknowledged he omitted this latter figure from his estimated range of
MCI’s exposure based on his assumption that “the project could be completed as
originally contracted within the amount remaining on the contract.” Id. at 102.
However, whether the Woods were entitled to an award of damages based on the
cost to complete the project remained a key issue to be decided at arbitration.
McFetridge also admitted he did not account for the possibility of any consequential
or general tort damages or statutory damages. Prior to the third mediation,
6
On appeal, Cincinnati argues the trial court erred by assigning to it the burden of proving
the settlement was unreasonable. We agree with the Court of Appeals that the trial court
properly understood that the settling parties, not Cincinnati, had the burden to prove
reasonableness. Wood, slip op. at 16-17.
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McFetridge’s calculations accounted only for the portion of defects for which MCI
assumed 65 percent liability and attorney fees of $180,000.
Unlike defense expert Barnes’s estimated total, the Woods’ expert estimated
total damages of $2.7 million to remedy defects and complete construction. Even
after subtracting the estimated $800,000 remaining on the contract (based on
McFetridge’s calculations), the plaintiffs’ expert testimony supported a damages
award of just under $2 million for the breach of contract claim, without regard to
consequential or tort damages, or treble damages under the CPA. Following more
discovery, the Woods’ financial expert estimated that MCI owed the Woods
$121,000 in reimbursement for overcharges and also noted that over $297,000 in
charges “were absent from the invoice detail.” CP at 339-40.
The trial court weighed varied and competing expert testimony that valued the
damages from around $150,000 to $2,700,000 for the breach of contract claim alone.
The trial court also recognized the Woods had potential tort and CPA claims and
thus reasoned that a judgment for the Woods “could have exceeded well over a
million dollars.” VRP at 142. What weight to give the competing estimates of the
value of the Woods’ claims was a matter within the trial court’s discretion.
In concluding the trial court abused its discretion, the Court of Appeals
majority misapprehended parts of the record and improperly gave greater weight to
certain defense expert testimony. The majority stated that “[t]he basis for the trial
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court’s determination was its belief that [MCI], itself, had valued the [Woods’]
contract damages at $1.2 million” when, in reality, MCI “valued the [Woods’]
contract damages at less than $350,000, which includes $200,000 for what the
[Woods] asserted they previously paid for repairs.” Wood, slip op. at 1 (emphasis
omitted). This statement is inaccurate for three reasons.
First, the trial court’s determination of reasonableness stemmed from its
thorough application of most of the nine Chaussee factors, not simply reliance on a
defense expert’s calculation of $1.2 million. Second, the majority is mistaken in
assuming the defense expert’s calculation of $350,000 included $200,000 for
previously paid repairs and that this estimate never increased. McFetridge first
asked for the $350,000 in settlement authority based on the most conservative
estimate by defense expert Buckles and on McFetridge’s own calculation of
$180,000 in attorney fees. He later requested settlement authority to approve the
$399,000 settlement after learning about the $200,000 the Woods had to pay for
repairs. By March 2018, McFetridge estimated that a conservative award of
damages to the Woods totaled approximately $526,000, based on defense expert
testimony, and thus he encouraged Cincinnati to fund the tentative settlement of
$399,000.
Third, the majority wrongly believed the trial court erred in attributing the
$1.2 million figure to a defense expert. Id. at 12 n.6. This issue appeared to most
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influence the majority’s decision to reverse, so it deserves a closer look. At the
reasonableness hearing, defense expert Barnes estimated the cost to remedy defects
at $540,341.76 and the cost to complete the project at $674,292.19; this totals
approximately $1.2 million in damages, as the trial court recognized. McFetridge
acknowledged he did not account for the second figure when requesting settlement
authority because he believed that the fact the Woods had not paid about
$800,000.00 of the contract price meant they would not be entitled to any damages
for the cost to complete the house. But the types of damages to which the Woods
were entitled remained an issue to be decided at arbitration. McFetridge noted the
terms of the contract stated the Woods would be entitled to damages for the cost to
complete the project if those damages exceeded the amount remaining on the
contract.
In measuring damages in contract construction cases, courts in Washington
follow Restatement (Second) of Contracts § 348 (Am. Law Inst. 1981), which
recognizes the injured party is entitled to “‘the reasonable cost of completing
performance or of remedying the defects if that cost is not clearly
disproportionate to the probable loss in value.’” Eastlake Constr. Co. v. Hess,
102 Wn.2d 30, 47, 686 P.2d 465 (1984) (quoting RESTATEMENT (SECOND) OF
CONTRACTS § 348, at 119-20). Consistent with this approach, in Eastlake, we
affirmed the trial court’s calculation of damages for the cost to complete the
project and damages for the cost
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of repairing nonconforming work performed by the defendant. Id. at 32, 35. We
also noted the trial court there had offset the amount owing on the construction
contract from the total award. Id. at 36-37.
Applying the Restatement approach, the trial court here fairly considered the
defense expert’s total evaluation of $1.2 million. McFetridge’s estimation that
$800,000 remained on the contract could have lessened this figure, but McFetridge
also did not calculate for loss of use damages, which are allowed under Eastlake.
See id. at 35 (allowing damages for the loss of reasonable rental value). Taking into
account the plaintiffs’ expert evaluation of $2.7 million and assuming an $800,000
offset, the Woods would still be entitled to $1.9 million for their breach of contract
claim alone. The Woods also sought additional damages, including $121,497 in
overpayments, $297,233 “for which sales tax was likely owed,” CPA damages
(treble damages), and attorney fees. Pet’r’s Suppl. Br. at 8. The trial court reviewed
all the evidence and took these other damages and costs into consideration in
reaching its reasonableness determination.
The Woods and the dissenting judge below persuasively argue that the Court
of Appeals majority “considered only the Defense side of the equation” and
improperly reweighed the evidence by relying on the most conservative damage
estimates from defense expert Buckles. Pet’r’s Suppl. Br. at 4; Wood, slip op. dissent
at 32 (Fearing, J., dissenting). The majority appeared to reverse the trial court based
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on a discrepancy it observed between the $350,000.00 damages figure it attributed
to defense expert testimony and the $1.2 million figure discussed by the trial court.
Wood, slip op. at 1-2. This overlooks the fact that McFetridge’s initial request for
$350,000.00 in October 2017 did not account for the higher-end evaluations by
defense expert Barnes and mediator-appointed-expert Shelton to remedy the alleged
defects. It also assumes defense expert Buckles’s opinion would prevail over all
other expert reports. See CP at 360, 453 (Barnes estimates cost to remedy defects at
over $540,000.00); see also id. at 419 (mediator-appointed-expert Shelton estimates
cost to remedy defects at over $562,327.12). The majority’s reliance on damages of
$350,000.00 also does not tell the whole story, given the increasing costs and
damages calculated in the following months. And McFetridge conceded he did not
ask for settlement authority beyond $399,000.00 because he realized Cincinnati
would not fund even that amount. Finally, the majority fails to account at all for the
extracontractual damages and attorney fees.
To conclude the trial court abused its discretion, the reviewing court must find
no reasonable person would agree with the trial court’s decision. Gilmore, 190
Wn.2d at 494. That cannot be said here. The Court of Appeals majority failed to
afford deference to the lower court’s reasonableness determination when it relied on
its own improper, and at times inaccurate, assessment of the damages for the Woods’
breach of contract claim and disregarded damages for the Woods’ other claims.
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Substantial evidence supports the trial court’s determination of damages. In
reversing, the Court of Appeals majority based its reasoning almost exclusively on
its disagreement with the trial court’s damages assessment. We reject the Court of
Appeals analysis in that regard and review the trial court’s application of the
remaining Chaussee factors for an abuse of discretion.
B. Merits of Liability Theory and Defenses
The second and third Chaussee factors examine reasonableness in light of the
merits of the plaintiff’s liability theory and the potential defenses to liability. No
party disputes MCI’s liability for the construction defects in the Woods’ home. The
trial court commented that the Woods’ damages stood out “quite a bit,” “especially
with the defense conceding that there was liability on the defendant’s part.” VRP at
142, 141. The Woods also presented compelling arguments for relief against
Milionis in his personal capacity based on Milionis’s fraudulent conduct,
misrepresentation, and commingling of MCI’s funds with his own personal affairs.
As for defenses, MCI had moved to dismiss the bulk of the Woods’ claims on
summary judgment at arbitration. McFetridge noted he had brought similar motions
in the past that were considered at arbitration and he believed his current motion was
meritorious. Yet, McFetridge did not specify that any of those past motions were
granted, and the trial court was well within its discretion to express uncertainty on
whether the present motion would have succeeded.
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The mere potential that McFetridge’s summary judgment motion may have
led to the dismissal of some of the Woods’ claims stands in contrast to the situation
in Water’s Edge. There, the trial court’s prior ruling granting partial summary
judgment to dismiss the plaintiff’s warranty claims “effectively ‘gutted’ the
[plaintiff’s] case.” 152 Wn. App. at 587. Here, the Woods appear to have a strong
case for liability on multiple theories and the defenses to liability were unresolved
at the time of settlement. Accordingly, the trial court did not abuse its discretion in
assessing liability and defenses to liability.
C. The Released Person’s Ability To Pay
When a defendant, “[b]y virtue of [a] bankruptcy discharge,” has a “complete
defense to personal liability,” courts recognize “the reasonableness of a settlement .
. . is open to question because the insured will have no incentive to minimize the
[settlement] amount.” Werlinger v. Warner, 126 Wn. App. 342, 351, 109 P.3d 22(2005) (citing Besel, 146 Wn.2d at 737-38). The trial court here remarked that a “$2
million judgment . . . would probably push [Milionis] into bankruptcy if he doesn’t
have enough assets to cover that,” but it found this factor was not dispositive. VRP
at 143. In part this is because the Woods pointed out that a successful suit against
Milionis in his personal capacity “would have included attaching and enforcing liens
against personal and real property and garnishing bank accounts and any contract
proceeds from other projects or wages.” CP at 611. The trial court concluded that
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Milionis “could end up in bankruptcy, but at this point, I only have that he hasn’t
filed bankruptcy, and there still would be assets at this time.” VRP at 143. There
was no evidence in the record suggesting Milionis or MCI were judgment proof, and
the trial court did not abuse its discretion in analyzing the defendants’ ability to pay.
D. Evidence of Bad Faith, Fraud, or Collusion
This court recognizes that “a covenant not to execute raises the specter of
collusive or fraudulent settlements” and, to that end, the Chaussee analysis
“promotes reasonable settlements and discourages fraud and collusion.” Besel, 146
Wn.2d at 738. In Water’s Edge, the trial court determined a covenant judgment was
unreasonable based on several troubling circumstances: (1) counsel for the plaintiff
contacted the defendants without notice to the insurance-appointed defense counsel
and recommended the defendants obtain independent counsel, (2) the parties
“realigned their interests by stipulating that [the defendants] could recover their
$215,000 contribution if the [plaintiff] prevailed in its malpractice and bad faith case
[against the insurer], and (3) neither of the defendants “had any reason to care what
dollar amount they agreed to, so long as they could sell it to the trial court as
reasonable.” 152 Wn. App. at 595-96.
One of Cincinnati’s main arguments against the reasonableness of the
covenant judgment was that “a lack of serious negotiation [on behalf of the parties]
suggests that there was bad faith.” VRP at 137. Cincinnati also raised alarm that
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the parties’ initial settlement for $399,000 increased to $1.7 million and that
McFetridge was not included in the parties’ final settlement discussions. The trial
court expressed concern that McFetridge was “involved in the three prior mediations
and then they get to this new one and he’s cut out of that.” Id. at 143. Even so, the
court noted this fact was less troubling given that damages already appeared to
exceed $500,000 and, yet, Cincinnati was still not forthcoming with the settlement
authority McFetridge requested.
Over the course of three mediations, Cincinnati never raised McFetridge’s
settlement authority above $100,000, despite his request for settlement authority of
$399,000. McFetridge admitted he never asked for any higher settlement authority
once he realized Cincinnati was unwilling to fully fund the $399,000 settlement
tentatively reached at the third mediation. This prompted the trial court to ask
Cincinnati’s counsel, “What good would it be to have [McFetridge] at those [later]
negotiation tables then if he has no authority to settle anything?” Id. at 138.
Cincinnati also failed to present evidence of communications or other circumstances
to suggest collusion between the Woods and MCI. Unlike in Water’s Edge, nothing
in this record indicates any collusion or bad faith between the Woods’ counsel and
MCI’s personal counsel. Instead, the parties pursued settlement negotiations for
almost two years, while damages and attorney fees continued to mount, before
ultimately turning to the covenant judgment option. Given all the facts before the
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trial court, the court did not abuse its discretion in determining there was no evidence
of fraud or collusion to suggest the settlement reached was unreasonable.
E. Remaining Chaussee Factors
While the above factors are most significant in this case, no single Chaussee
factor controls a trial court’s reasonableness determination and not every factor will
apply in a particular case. Besel, 146 Wn.2d at 739 n.2. Here, the trial court
discussed other Chaussee factors to support its decision that the $1.7 million
settlement was reasonable. First, the trial court noted that “the risks and expenses
of continued litigation” were considerable given “the amount of money [the Woods]
have expended to bring in a forensic expert, to bring in the depositions and expenses
of that litigation, as well as . . . prepping for time.” VRP at 142. Second, the court
noted that “there was extensive investigation and preparation” by the defendants
based on expert testimony, briefs filed for arbitration, and three separate mediations.
Id. at 144. Insurance-retained-counsel McFetridge was involved throughout the
mediations and in the months leading up to arbitration. Lastly, the court accounted
for Cincinnati’s interest as the insurer to the party being released. The trial court
granted Cincinnati’s request to intervene so it could participate in the reasonableness
hearing. And before the second day of the reasonableness hearing, the trial court
allowed Cincinnati to submit additional pleadings and exhibits and considered
Cincinnati’s arguments in reaching its ruling.
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Considering everything in the record, substantial evidence supports the trial
court’s determination that the $1.7 million covenant judgment is reasonable. The
Woods presented evidence that their damages could well exceed $2 million. Beyond
the contract damages, the Woods claimed significant consequential and tort
damages. If they prevailed on their CPA claim, the Woods would also be entitled to
treble damages. The defendants did not dispute they were at least partially liable
and, prior to the final settlement, none of the Woods’ claims had been dismissed on
summary judgment. Neither Milionis nor MCI had filed for bankruptcy. And the
settlement was ultimately reached after years of failed negotiations, while damages
and costs continued to rise. Based on all of the evidence, we hold the trial court was
well within its discretion to find the $1.7 million settlement reasonable. The Court
of Appeals majority failed to apply the appropriately deferential standard of review
and instead improperly reassessed and reweighed some of the evidence. We
therefore reverse the Court of Appeals and reinstate the trial court’s order.
We conclude by addressing the argument of amici APCIA et al., which
criticizes the trial court for denying Cincinnati’s continuance and discovery requests
and argues for a bright line rule allowing insurers to conduct additional discovery
before reasonableness hearings. Br. of Amici Curiae APCIA et al. at 11-17.
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III. The Trial Court Did Not Abuse Its Discretion in Denying Cincinnati’s
Request for a Continuance and Additional Discovery
Whether to allow continuances and to limit discovery are discretionary
decisions—here, the trial court did not abuse its discretion when denying
Cincinnati’s requests for a continuance and additional discovery. Amici argue
covenant judgments “inherently carry with them the risk of collusion and fraud” and,
therefore, urge us to establish a bright line rule that “those insurers against whom
the covenant judgment will be used should always be entitled to discover the
communications surrounding the settlement negotiations between the insured’s
lawyer and the plaintiff’s lawyer.” Id. at 12. This rule would unwisely eliminate the
discretion of trial courts to address the circumstances in each case when ruling on
motions for a continuance or discovery.
Typically, “[w]e review a trial court’s denial of a continuance for abuse
of discretion.” Pub. Util. Dist. No. 1 of Klickitat County v. Int’l Ins. Co., 124
Wn.2d 789, 813, 881 P.2d 1020 (1994). We apply the same abuse of discretion
standard to a trial court’s decision to permit or deny discovery. T.S. v. Boy
Scouts of Am., 157 Wn.2d 416, 423, 138 P.3d 1053 (2006); Howard, 121 Wn.
App. at 379. A trial court’s discovery order is reversible only if the order is
manifestly unreasonable or exercised on untenable grounds or reasons. T.S., 157
Wn.2d at 423.
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In the context of reasonableness hearings, trial courts may grant an insurer’s
motion for additional discovery or a continuance. See, e.g., Bird, 175 Wn.2d at 763(granting insurer’s motion for discovery and a continuance); see also Water’s Edge,
152 Wn. App. at 582 (granting insurer’s motion to intervene and conduct limited
discovery). At the same time, trial courts may also reasonably deny such motions.
See, e.g., Red Oaks Condo. Owners Ass’n v. Sundquist Holdings, Inc., 128 Wn. App.
317, 321, 116 P.3d 404 (2005) (holding six days’ notice afforded sufficient time to
prepare for the reasonableness hearing);7 see also Howard, 121 Wn. App. at 379
(denying an insurer’s request to reopen discovery because the insurer “was not a
complete stranger to the case” and “had the opportunity to participate in [prior]
discovery” (internal quotation marks omitted)).
Here, Cincinnati received notice of the parties’ settlement one week before
the reasonableness hearing. Following this notice, the trial court granted
Cincinnati’s motion to intervene but denied its motions for additional discovery and
a continuance. In denying the latter motions, the trial court reasoned there was
“enough in discovery for Cincinnati to give the Court an idea of why” the settlement
7
The Court of Appeals in Red Oaks considered the argument for a de novo standard of
review where the appellant claimed “a violation of its right to constitutional due process,”
but the court concluded that “[u]nder either standard . . . [the appellant] was afforded
sufficient notice and time to prepare [for the reasonableness hearing for a covenant
judgment].” 128 Wn. App. at 321.
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was not reasonable. VRP at 47-48. Moreover, the trial court accurately noted that
the purpose of discovery is to aid its reasonableness determination and that the
discovery Cincinnati was requesting did not appear to relate “to the reasonableness
of the settlement” so much as it related to potential “collusion against Cincinnati.”
Id. at 47. Following these rulings, the trial court heard Cincinnati’s arguments
against the reasonableness of the covenant judgment. Due to time constraints on the
day the hearing was first set, Cincinnati received a de facto continuance, and the trial
court considered its additional pleadings and exhibits offered one day before the
resumed hearing.
We find the situation here closely aligns with Red Oaks and Howard for
purpose of continuance and discovery motions. Similar to the insurer in Red Oaks,
Cincinnati received sufficient notice and time to prepare for the reasonableness
hearing. And, like the insurer in Howard, Cincinnati was not a stranger to the case
and had been heavily involved in multiple settlement discussions in the months just
before the scheduled arbitration. Thus, the trial court acted within its discretion in
denying Cincinnati’s request for a continuance and additional discovery. We reject
the contrary rule proposed by amici.
CONCLUSION
We reverse the Court of Appeals and hold the trial court did not abuse its
discretion in finding the covenant judgment reasonable. The trial court considered
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the relevant Chaussee factors and its reasonableness determination is supported by
substantial evidence. The Court of Appeals majority erroneously reweighed the
evidence and substituted its own judgment for the trial court’s, contrary to the
deferential standard of review that applies. Lastly, we find no reversible error in the
trial court’s discretionary decision to deny Cincinnati’s request for a continuance
and additional discovery.
WE CONCUR:
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