NO. 95-543

IN THE SUPREME COURT OF THE STATE OF MONTANA

1996

SHERMAN BARTLETT,

Plaintiff and Appellant,

ALLSTATE INSURANCE COMPANY.

APPEAL FROM: District Court of the Fourth Judicial District,

In and for the County of Missoula,

The Honorable John W. Larson, Judge presiding.

COUNSEL OF RECORD:

For Appellant:

Roderick K. Ermatinger; Attorneys, Inc.;

Missoula, Montana

For Respondent:

Steven S. Carey; Carey, Meismer & McKeon;

Missoula, Montana

Filed:

Submitted on Briefs: September 12, 1996

Decided: December 10, 1996

Clerli
Justice Charles E. Erdmann delivered the opinion of the Court.

Sherman Bartlett appeals from opinions and orders issued by

the Fourth Judicial District Court, Missoula County, granting

summary judgment in favor of Allstate Insurance Company. We affirm

in part and reverse in part.

We address the following issues on appeal:

1 . Did the District Court err in determining that Bartlett

did not have an insurable interest in the property at the time of

loss?

2 . Did the District Court err in determining that Bartlett

did not have colorable claims for unfair trade practices or for

fraud, constructive fraud, or punitive damages?

3 . Did the District Court err in managing discovery or in

awarding costs?

On appeal, the appellant also raised the issue of whether the

District Court erred in ruling that material misrepresentations on

the application for insurance precluded recovery. However, we

affirm the District Court's grant of summary judgment to Allstate

on the basis of our holding in Issue 1, and therefore determine it

is not necessary to discuss this issue.

FACTS

In November 1990, Bartlett entered into a buy-sell agreement

with the Montana Bank of Mineral County to purchase a residence and

one acre of land in Missoula for $31,000. The Bank agreed to close

the transaction on November 28, 1990, and instructed Bartlett that

he must obtain an insurance binder on the property before closing.

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On November 27, 1990, Bartlett met with an agent from Allstate

Insurance Company, Surilda Hanks, to obtain the insurance binder.

Hanks prepared an application for a landlord's package policy in

which Allstate agreed to insure the property, naming Bartlett as

the insured and the Bank as loss payee under the policy as first

mortgagee. Hanks completed the application in Bartlett's presence

based upon information Bartlett provided to her. The completed

application indicated that the purchase price for the property was

$50,000 and that the property had not been vacant for more than

thirty days. Allstate insured the dwelling for $68,000 and

Bartlett's personal property for $3,400. Bartlett signed the

application and the insurance was to become effective on

November 28, 1990.

On November 28, 1990, Bartlett and the Bank president met to

transfer the deed and trust indenture. The Bank had discovered a

prior lien against Bartlett for a $10,000 child support judgment

and was concerned that this lien would attach to the property and

therefore declined to proceed with the closing. Bartlett notified

Hanks the same day that the transaction had not closed. As a

result, Hanks did not submit the binder to Allstate and Allstate

never processed the policy. Bartlett never paid a premium for

insurance coverage.

On December 23, 1990, a fire completely destroyed the home

Bartlett intended to purchase. In January 1991, Bartlett made a

demand upon Allstate requesting the full policy limits of $71,400

plus interest. Allstate denied Bartlett's demand, stating that the

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binder was intended to become effective at the time of closing,

which never occurred. Allstate claimed that Bartlett had cancelled

the policy prior to the fire when he called Hanks to inform her

that the closing had not taken place, and that, in any event, the

Bank had assumed the risk of loss. In October 1992, the Bank

assigned any interest it may have had in the insurance policy to

Bartlett.

On November 24, 1992, Bartlett filed a complaint and demand

for jury trial against Allstate seeking to recover for wrongful

denial of the insurance proceeds. In April 1994, Bartlett filed an

amended complaint alleging that, in addition to the original

claims, Allstate violated § 33-18-201, MCA, which is Montana's

prohibition against unfair trade practices. Each party filed

motions for summary judgment, and on August 31, 1994, the District

Court issued an opinion and order granting summary judgment in

Allstate's favor and dismissed all of Bartlett's claims. The

District Court determined that the policy was void abinitio because

of material misrepresentations, that the buy-sell agreement did not

provide Bartlett with an insurable interest, and that the Bank's

assignment of its interest in the policy to Bartlett failed. The

court dismissed Bartlett's claims, including those for fraud,

constructive fraud, and unfair trade practices, and determined that

Bartlett had no claim for punitive damages.

On the same day the court issued its summary judgment ruling,

it issued an order in response to motions filed by each party.

Allstate had moved the court for a protective order on discovery

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related to the unfair trade practices claim, alleging that Bartlett

was pursuing discovery beyond the limits allowed by the Montana

Rules of Civil Procedure. Bartlett had also filed a motion to

compel the production of a statement given by Hanks after the

insurance binder had been signed. The District Court granted

Allstate's motion and stayed further discovery, and denied

Bartlett's motion. The court also awarded Allstate certain costs

for depositions which had been taken.

Bartlett subsequently filed a motion to amend or alter the

District Court's summary judgment order. On November 4, 1994, the

court issued an opinion and order reaffirming its decision on

summary judgment but vacating its summary judgment ruling on the

unfair trade practices claim. The court continued its protective

order concerning discovery on that claim. On December 22, 1994,

the District Court issued an opinion and order awarding costs to

Allstate in the amount of $1,414, and on July 14, 1995, the court

granted Allstate's motion for summary judgment on the unfair trade

practices claim. This appeal followed.

STANDARD OF REVIEW

Our standard of review in appeals from summary judgment is

de now. Motarie v. Northern Mont. Joint Refuse Dist. (19951, 274

Mont. 239, 242, 907 P.2d 154, 156; Mead v. M.S.B., Inc. (1994), 264

Mont. 465, 470, 872 P.2d 782, 785. When we review a district

court's grant of summary judgment, we apply the same evaluation as

the district court based on Rule 56, M.R.Civ.P Bruner v.

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Yellowstone County (1995), 272 Mont. 261, 264, 900 P.2d 901, 903.

In Bruner we set forth our inquiry:

The movant must demonstrate that no genuine issues of

material fact exist. Once this has been accomplished,

the burden then shifts to the non-moving party to prove

by more than mere denial and speculation that a genuine

issue does not exist. Having determined that genuine

issues of material fact do not exist, the court must then

determine whether the moving party is entitled to

judgment as a matter of law. We review the legal

determinations made by the district court as to whether

the court erred.

Bruner, 900 P.2d at 903.

ISSUE 1

Did the District Court err in detertiining that Bartlett did

not have an insurable interest in the property at the time of loss?

Bartlett argues that he had an insurable interest in the

property at the time of the loss. He claims that the buy-sell

agreement between him and the Bank was legally binding on both

parties. The agreement obligated the Bank to transfer title to the

property to Bartlett and in turn Bartlett was obligated to purchase

the property. Bartlett argues that at the time of the loss the

buy-sell agreement was still legally enforceable since neither

party had terminated it

Bartlett also contends that he is entitled to the Bank's

interest under the binder, relying on the fact that the Bank

assigned its interest in the binder to him in October 1992.

Bartlett argues that even if his interest was voided due to

material misrepresentations on the insurance application, a

mortgagee's interest remains protected. He claims he is entitled

6
to receive from Allstate the Bank's monetary interest in the

policy.

Section 33-15-205, MCA, provides that no contract of insurance

shall be enforceable except for the benefit of persons having an

insurable interest in the property at the time of the loss.

Subsection (2) defines "insurable interest" as any actual, lawful,

and substantial economic interest in the safety or preservation of

the property insured. A purchaser of real estate may have an

insurable interest in property to which he or she does not hold

title if an enforceable executory contract has been executed which

gives the purchaser the right to possess the property. See

Musselman v. Mountain West Farm Bureau Mut. Ins. Co. (1992), 251

Mont. 262, 824 P.2d 271.

1n the present case, the buy-sell agreement executed by the

parties stated that Bartlett would execute a promissory note in

favor of the Bank and that the property would be secured with a

first position trust indenture. The terms of the buy-sell

agreement clearly made the sale contingent upon the Bank holding a

first position trust indenture. When the Bank discovered a $10,000

unsatisfied child support judgment against Bartlett, it could not

be assured of a first position security interest. Bartlett did not

eliminate the judgment lien and the condition precedent to the

buy-sell agreement becoming effective was not met. The agreement

was therefore terminated and the Bank was the unconditional owner

of the property.
MOreOVer, our examination of the record substantiates the fact

that Bartlett did not believe he owned the property at the time of

the loss. Hanks testified that Bartlett called her and told her

that the deal did not go through and that he did not need the

insurance. Hanks testified that following the fire Bartlett called

her to ask about the insurance. She said she had done nothing

"because you told me not to." Bartlett responded by stating

'I [wlell, that's a good thing because the house burned down last

night." Scott Waldron, the Fire Chief who responded to the fire,

testified that he spoke with Bartlett at the scene of the fire.

According to Waldron, Bartlett said he had not been there that

night, that he did not own the property, and the Bank was the one

with the problem.

Finally, Bartlett's attempt to bootstrap into the Bank's

rights to recover under the policy is baseless. The record clearly

indicates that the Bank took the unequivocal position that it had

no interest in the policy because the deal had never gone through.

In fact, the record indicates that the Bank looked to its own

blanket insurance policy for coverage. The Bank had no interest in

the binder which it assigned to Bartlett and therefore neither did

Bartlett as the assignee.

We conclude that the District Court did not err when it

concluded that Bartlett did not have an insurable interest in the

property at the time of loss, and on that basis affirm the court's

summary judgment ruling.

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ISSUE 2

Did the District Court err in determining that Bartlett did

not have colorable claims for unfair trade practices or for fraud,

constructive fraud, or punitive damages?

The District Court granted summary judgment to Allstate on

Bartlett's unfair trade practices claim, stating that no policy

coverage existed and Allstate therefore had a reasonable basis in

law or fact to deny coverage. Bartlett, however, argues that

discovery is essential to determine whether Allstate had a

reasonable basis to deny the insurance claim and therefore requests

this Court to reverse not only the District Court's grant of

summary judgment to Allstate but also to reverse the court's order

which precluded discovery on the matter.

Bartlett argues that § 33-18-242, MCA, entitles him to

maintain a third-party action against Allstate for unfair trade

practices. He argues that his claim is based only in part on the

existence of the insurance policy and therefore even if the

insurance policy is found to be void, his claim survives.

We first note that in the context of bad faith tort actions,

a third-party claimant is typically a person who has a claim

against the insured party for certain injuries. See O'Fallon v.

Farmers Ins. Exchange (1993), 260 Mont. 233, 859 P.2d 1008; Klaudt

v. Flink (1982), 202 Mont. 247, 658 P.2d 1065. Here, that is not

the case since Bartlett alleges he is a third-party claimant even

though he also claims to be the insured party. Without addressing

the question of whether Bartlett is or is not a third-party

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claimant, as that term is used in § 33-18-242, MCA, we determine

that his claim must fail

Section 33-18-242(5 )

held liable for unfair

reasonable basis in law, 3 3

, MCA, states that an insurer may not be

trade practices if the insurer had a

< in fact for contesting the claim or the

amount of the claim, whichever is at issue. Here, we have affirmed

the District Court's determination that Bartlett did not have an

insurable interest in the property and, on that basis, Allstate

clearly had a reasonable basis for not paying Bartlett's claim for

insurance proceeds. We therefore conclude that the District Court

did not err when it determined that Bartlett did not have a

colorable claim against Allstate for unfair trade practices.

With respect to Bartlett's claim for fraud, Rule 9(b),

M.R.Civ.P., requires that the circumstances constituting fraud must

be stated with particularity in the pleadings. In order to prove

fraud, the plaintiff must establish nine elements: (1) a

representation; (2) its falsity; (3) its materiality; (4) the

speaker's knowledge of its falsity or ignorance of its truth; (5)

the speaker's intent that it should be relied on; (6) the hearer's

ignorance of falsity of the representation; (7) the hearer must

rely on the representation; (8) the hearer's right to rely on the

representation; and (9) consequent and proximate injury caused by

reliance on the representation. Pipinich v. Battershell (1988),

232 Mont. 507, 511, 759 P.2d 148, 151.

This Court has held that if the specific facts constituting

the alleged fraud are not stated with particularity, the claim must

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be dismissed. See Pioinich, 759 P.2d at 150-51; Martin v. Dorn

Equip. CO. (1991), 250 Mont. 422, 429, 821 P.Zd 1025, 1029.

Bartlett's amended complaint simply stated that "Defendant is

liable to Plaintiff for fraud for reasons set forth herein." The

amended complaint clearly fails to set forth the allegation of

fraud with sufficient specificity. We therefore conclude that the

District Court did not err when it dismissed Bartlett's claim for

fraud.

Bartlett also alleges constructive fraud based upon the

allegation that Hanks created a false impression that he was

insured and that she failed to disclose that information provided

by Bartlett concerning the package deal and vacancy would likely

cause Allstate to void the policy.

Section 28-2-406, MCA, defines constructive fraud as (1) any

breach of duty which, without an actually fraudulent intent, gains

an advantage to the person in fault or anyone claiming under him by

misleading another to his prejudice or to the prejudice of anyone

claiming under him, or (2) any such act or omission as the law

especially declares to be fraudulent, without respect to actual

fraud. Here, the record does not support Bartlett's claim for

constructive fraud.

Hanks testified that she told Bartlett that Allstate did not

insure vacant houses. She also testified that on November 30,

1990, two days after Bartlett had initially informed her that the

closing had not occurred, Bartlett informed her "I don't have a

deal, the deal is done, there's nothing going on, I don't need the

1 1
insurance. I' Furthermore, Bartlett's own actions indicate he did

not believe he needed insurance. He cannot now be allowed to claim

that Hanks misrepresented information to him causing him to believe

he was insured. We therefore conclude that the District Court did

not err when it dismissed Bartlett's claim for constructive fraud.

Finally, we determine that the District Court did not err in

dismissing Bartlett's claim for punitive damages. Section

27-l-221, MCA, allows for an award of punitive damages if the

defendant is found liable for fraud or actual malice. In light of

our holdings above, we conclude that the court correctly rejected

Bartlett's claim for punitive damages.

ISSUE 3

Did the District Court err in managing discovery

awarding costs?

o r

Bartlett argues that the District Court erred by issu.ing

i n

its

protective order staying discovery related to the unfair trade

practices claim. He also argues that the court erred when it

denied his request to compel the production of a recorded statement

made by Hanks to Allstate in January 1991.

W e have stated that the district court has inherent

discretionary power to control discovery under its authority to

control trial administration and that the lower court is in a

better position than this Court to supervise the day-to-day

operations of discovery. State ex rel. Guarantee Ins. Co. v.

District Court (19811, 194 Mont. 64, 67-68, 634 P.2d 648, 650. We

have stated that the objective of the district court in controlling

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and regulating discovery is to ensure a fair trial to all

concerned, neither according one party an unfair advantage nor

placing the other at a disadvantage. Hobbs v. Pacific Hide & Fur

Depot (1989), 236 Mont. 503, 512, 771 P.2d 125, 131.

Here, in light of our holding above that Allstate had a

reasonable basis for denying Bartlett's claim due to the lack of an

insurable interest, we determine that the District Court did not

abuse its discretion when it issued the protective order concerning

discovery with respect to the unfair trade practices claim.

However, we conclude that the District Court abused its

discretion when it denied Bartlett's motion to compel Hanks'

statement. Rule 612, M.R.Evid., provides that if, before

testifying, a witness uses a writing to refresh his or her memory,

then the adverse party is entitled to have the writing produced.

Here, both Jeffery Mann, Allstate's underwriter, and Hanks reviewed

Hanks' January 1991 statement prior to testifying in their

depositions and the court, therefore, erred in not compelling the

production of Hanks' statement. Nevertheless, in light of our

holdings above, we determine that the court's error in this regard

is harmless.

Bartlett also argues that the District Court erred in awarding

costs in the amount of $1,414 to Allstate. Specifically, Bartlett

claims that he should not be required to pay the transcription

costs of the video taped depositions of Hanks and Mann. Bartlett

relies on Rule 30(h), M.R.Civ.P., which allows for an audio-visual

or tape recorded deposition without a stenographic record.

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We have stated that the court is empowered to award costs to

the prevailing party on summary judgment and to include the costs

of depositions as long as they are reasonable in amount and

necessary to the summary judgment. Harrison v. Chance (1990), 244

Mont. 215, 227, 797 P.2d 200, 207. Section 25-10-103, MCA,

provides that the court has the discretionary power to apportion

costs between the parties, and § 25-lo-201(2), MCA, lists expenses

of taking depositions as allowable costs.

In this case, the District Court granted summary judgment to

Allstate based not only on the fact that Bartlett did not have an

insurable interest in the property, but also because the

application for insurance contained material misrepresentations.

However, since our holding is based only on the fact that Bartlett

did not have an insurable interest, we determine that the court's

award of costs should reflect only those costs which were necessary

for that purpose. We therefore reverse the District Court's award

of costs and remand the case to the court for a determination of

which costs were necessary for summary judgment on the basis of

Bartlett's lack of an insurable interest in the property.

Affirmed in part, reversed in part, and remanded for further

proceedings consistent with this opinion.

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I We concur: