No. 93-416 IN THE SUPREME COURT OF THE STATE OF MONTANA

HAINES PIPELINE CONSTRUCTION, INC.

-vMONTANA POWER COMPANY.

APPEAL FROM: District Court of the Second Judicial District, In and for the County of Silver Bow, The Honorable James E. Purcell, Judge presiding.

COUNSEL OF RECORD: For Appellant: Randy J. Cox & Sam 

### E. Haddon, Boone, Karlberg & Haddon, Missoula, Montana For Respondent: BruceR. Toole & Donald L. Harris, Crowley, Haughey, Hanson, Toole & Dietrich, Billings, Montana

Filed: Submitted on Briefs: April 7, 1994 Decided: June 20, 1994

### Justice James C. 

### Nelson delivered the opinion of 

### the Court. 

### Haines Pipeline Construction, 

### Inc., (Haines) appeals from 

### a judgment entered on August 9, 1993, in favor of Montana Power Company (MPC) 

### and against Haines on all claims set forth in its Third Amended complaint. The District Court, Second ~udicial District, Silver Bow County determined that Haines had failed to prove fraud or 

### constructive fraud which would entitle Haines to



### recover any damages, either actual or punitive. We reverse and remand. We state the issues on appeal as follows:

(1) 

### Did the District Court 

### err in refusing to apply findings of 

### fact and conclusions of law issued by the District Court in Haines 

### Iand affirmedon appeal 

### todetermine if Haines was entitled to 

### summary judgment? (2) Did the 

### District Court err 

### in holding 

### a de novo trial after which it issued findings of fact and conclusions of 

### law contrary to the findings and conclusions affirmed on appeal from Haines 

### I? This same case was before us on appeal in Haines Pipeline Constr. v. Montana Power (1991), 251 

### Mont. 422, 830 

### P.2d 1230



### (hereinafterHaines 

### I), where Haines sued MPC for bad faith and breach of 

### contract. The underlying facts giving rise to the 

### cause of action are set forth in Haines I, 

### and, as necessary to the determination of this case, are restated here. 

### In June 1983,Haines and MPC 

### entered into a 

### written contract for the construction of 

### a 16 

### inch natural gas pipeline from Warm 2springs to Cut Bank, Montana. In lieu of a construction bond, the parties required Haines topost an irrevocable letter of credit in the amount of $750,000 in favor

### of MPC, and tomaintain such letter of credit until final acceptance and payment of the work under the contract. Construction of the pipeline required that Haines weld sectionsof thepipe inaccordancewithprocedures developedbyMPC and in compliance with federal regulations. No welds were buried unless theyhad been inspectedand approvedbyMPC andGamma Sonics

(Gamma),

### a companyhired by MPC to provide X-ray inspection of the welds. The projecthad regulatoryproblems which were brought to the attention of the Montana Public Service Commission (PSC) by labor leaders and the Department of Transportation. Hearings were held

on several alleged federal safetyviolations, regarding primarily the padding of the bed underneath the pipeline. To avoid further hearings, MPC developeda atplan todemonstrate fitness for service" of theportion of thepipeline thathad been constructedand agreed to postpone further construction. On April 16, 1984, the letter of credit was reduced to $250,000 and the parties agreed to extend the expiration date to November 15, 1984. On April 23, 1984, the construction 

### contract having been suspended pursuant to the fitness plan, the parties entered into a settlement agreement covering all work done to that date.MPC hired Southwest Research ~nstitute(SRI)to re-check theX-ray inspection of Gamma. Haines and MPC entered into a second contract onMay 8, 1984,whereby Haines was to assistMPC in doing miscellaneous repair work on the completed portion of pipeline includingrepairof buried pipeline identifiedby 

### SRIasdefective. Under thiscontract Haines waspaid asan independent contractor on

an hourly basis. On October 15, 1984, MPC Chief Executive Officer, Paul Schmechel, distributed a memorandum in response to the board of directorsr concerns about the pipeline. Thememorandum indicated that MPC would 81move~ainesoff the jobw by mid-November. Furthermore,thememorandum indicatedthat the letter of creditwas set to expire on November 15, and that the circumstances surrounding repairwork were being reviewed to determine if claims should be made against Haines. On October 22, 1984,~aines as a "good faithgesture" extended the letter of credituntil May 15, 1985,at the request of MPC. On November 16, 1984, MPC terminated the June 1983 contract with Haines, pursuant to paragraph 31.0, allowing MPC to terminate 

### at its convenience. MPC conducted an internal audit of thepipeline construction. The audit focused on the shortcomings of MPC's supervision of Haines and Gamma. One of the recommendations of the audit was to proceed against: Gamma for the cost of digging up the pipeline and making the necessary repairs. Itwas later determined that Gamma had insufficient assets to pursue. In January of 1985, MPC retained a law firm to advise thecompany if it had a claim against Haines for the cost of fixing defective welds. MPC did not provide the firm with the audit report. MPC received an opinion letter from the law firm on May 10, 1985, advising MPC that it could assert both contractual and negligence claims against Haines to recover the costs MPC would incur in repairing the defective welds. Subsequently, MPC attorney, Robert Gannon, recommended to MPC's vice chairman, Jack Burke, that MPC draw upon the $250,000 letter of creditwhich was due to expireWednesday,May 15. Gannon concludedthatthecostsof repairing the weldswould substantially exceed the value of the letter of credit. On Tuesday, May 14, Gannon and Burke met with MPC1s CEO, Paul Schmechel, to obtain authority to draw upon the letter of credit. On May 15, 1985, MPC drew upon the letter of credit after informing Haines that it had failedtoperformproper weldingunder the contract. Haines responded stating that it had no further responsibility for thewelds once theyhad been X-rayed, approved, and the pipe buried. Haines initiated an action in the Second Judicial District Court, Silver Bow County to recoverdamages against MPC forbreach of the construction contract. After a bench trial the District Court entered its findings and conclusions. The court ruled that MPC had accepted Haineslwork, had no authority to draw upon the letter of credit and that presentment of the letter of credit constituted a breach of the construction contract. Furthermore, the District Court concludedthatMPC misled Haines into extendingthe letter of credit constituting

### a breach of the implied covenant of good faith and fair dealing. Finally,the court concluded that the breach was oppressive conduct justifying the imposition of punitive damages. MPC appealed the District Court's judgment awarding Haines compensatory and punitive damages. Regarding the compensatory damages, we affirmed in part and reversed in part. As to the punitive damages, we reversed and remanded, granting the parties leave to amend theirpleadings. We remanded the award of punitive damages,because of the intervening change of 

### law in Story

### v. City of Bozeman (1990), 242 Mont. 436, 791 P.2d 767, which eliminated the award of tort damages forbreach of the covenant of good faith and fair dealing, absent a special relationship. We allowed the parties to amend theirpleadings to allege fraud,or other theories consistent with our decision in Haines I. Followingthe remand (hereinafter Haines 11)

## ,MPC substituted Judge Olson, the District Court judge who had tried Haines I. Haines filed a Third Amended Complaint alleging fraud and constructive fraud. Haines moved for summary judgment based upon the findings and conclusions of the District Court in Haines I, affirmed by this Court, that MPC wrongfully 

### enticed Haines into extending the letter of credit. The District 

### Court in Haines 11, denied the motion and stated in 

### its memorandum that: It is noted that Judge Thomas OLson8s Findings and Conclusions were based upon evidenceproduced in support of the Second Amended Complaint. The District Court found forPlaintiff and the SupremeCourt affirmed there was a Breach of the Covenant of Good Faith and Fair ~ealing and consequently a Breach of the Contract. TheÐ in dings and Conclusions of Judge Olson are the law of 

### that case. (Emphasisadded.) The District Court went on to state, thisCourt feels that thismatter shouldbe tried denovo to determine if Fraud or Constructive Fraud did in fact exist. (Emphasis in original.) The District Court retried the case and found thatHaines had failed to prove either actual or constructive fraud. Indoing so, the District Court made findings directly contrary to the findings of fact and conclusions of law inHaines I,which were affirmedby this Court. On August 9, 1993, judgment was entered in favor of MPC and againstHaines on all claims set forth in its ThirdAmended Complaint. Haines appeals from this judgment. Haines contends that the District Court failed to properly apply the doctrines of collateral estoppel and lawof the casewhen it made findingswhich were directly contrary to the findings in Haines 

### I. We address each doctrine in turn. I. COLLATERAL ESTOPPEL The doctrineof collateral estoppel is similarto thedoctrine of res judicata. The doctrines differ in that res judicata bars the same parties from relitigating the same cause of action,while collateral estoppel bars the party against whom the claim is asserted, or a party in privity with the earlier party, from relitigating issues which have been decided with respect to a different cause of action. Boyd v. First Interstate Bank (1992), 253 Mont. 214, 218, 833 P.2d 149, 151. The collateral estoppelbar extends to all questions essential to the judgment which were determined by a prior judgment. 

# m,833 P.2d at 151.

7It is well established that this Court applies a three part test to determine if collateral estoppel bars relitigation of an issue. Aetna Life and Casualty Insurance Company v. Johnson (l984), 207Mont. 409, 413, 673 P.2d 1277, 1279; In reMarriage of Stout (1985), 216Mont. 342, 349-50, 701P.2d 729,733-34;Anderson

v. State (1991), 250 Mont. 18, 21, 817 P.2d 699, 701. The three prongs are: 1. Was the issue decided in the prior adjudication identical with the one presented in the action in question? 2. Was there a final judgment on the merits? 3. Was the party against whom the plea is asserted a party or inprivitywith a party to the prior adjudication? 

## w,673 P.2d at 1279. Indetermining whethercollateral estoppelapplies,satisfying the first prong of the test is the most crucial. State v. Young

(1993), 259 Mont. 371, 377, 856 P.2d 961, 965, citing Anderson v. State (1991), 250 Mont. 18, 21, 817 P.2d 699, 702. To meet this part, "the identical issue or 'precise question' must have been litigated in the prior action." 

# m,856 P.2d at 965. MPC contends that the first prong of the test isnot satisfied because the claim for breach of the implied covenant is not the same issue as claims for fraud and constructive fraud. Because fraud and constructive fraud were never considered in the proceedings in Haines I, MPC concludes that the findings from Haines I which were affirmed by this Court are irrelevant. We disagree and conclude that the firstprong of the three part testis met in this case. The term "issue" does not equatewith the elements of a cause of action. ThisCourt haspreviously declared that "[tlhe bar that arises from collateral estoppel extends to all questions essential to the judgment and actively determinedby apriorvalid judgment." Brault v. Smith (1984), 209 Mont. 21, 26, 679 P.2d 236, 238. Collateral estoppel also prevents relitigation of determinative facts which were actually ornecessarily decided inaprior action. 

# w, 833 P.2d at 151. In addressing whether a change in legal theory precludes the collateral estoppel bar, Moore's Federal Practice states: A new contention is not, however, necessarily a new issue. If a new legal theory or factual assertion put forward in the second action is "related to the subjectmatter and relevant to the is~ues*~ that were litigated and adjudicated previously, "so that it could have been raised, the judgment is conclusive on itdespite the fact that it was not in fact expressly pleaded or otherwise urged." (Citationsomitted.) Vol. lB, Moore's Federal Practice 9 0.443[2], at 760. In this case Haines originallypled breach of the covenant of good faith and fair dealing to recover punitive damages. As a result of our remand order Haines amended its pleadings to allege fraud and constructive fraud. Although the legal theory relied upon was different, this change did not result in a change in the facts and law established in Haines I. Therefore, the precise issue that MPC is collaterally estopped from relitigating is as foundby JudgeOlson, thewillful conduct of MPC inenticing Haines into renewing the letter of credit when in fact,all MPC was trying to do was gain time to be in a position to draw on the letter of 9credit. Moreover, because this Court affirmed the findings and conclusions of the District Court regarding MPCJs actions surroundingthe extension of the letterof credit,we also conclude that therewas a final judgment on themerits as to that issue and that the secondprong of the test is thus satisfied. Finally,the third prong is clearly satisfied as Haines advanced its claims againstMPC in Haines I and 11. In light of our holding in Haines 

### I, MPC is collaterally estopped from arguing that it did not mislead Haines into extending the letter of credit. 11. LAW OF THE CASE The law of the case doctrine also precludes relitigation of the factsand conclusions issued by the District Court inHaines I which we affirmed on appeal. The rule of law of the caseprovides that in deciding a case upon appeal,when the Supreme Court statfr. in its opinion a principle or rule of law necessary to the decision, such pronouncementbecomes the law of the case, and must be adhered to throughout its subsequent proceedings, both in the trial courtandupon subsequentappeal. Zavarelliv. Might (1989), 239 Mont. 120, 124, 779 P.2d 489, 492. The plaintiff in Zavarelli, originally brought an action attemptingto enjoin his sister fromdestroying or interferingwit:.

a sewer system. Zavarelliv. Miqht (l988), 230Mont. 288, 749 P.23 524. The district court in the firstproceeding found thatpart o: the septic system serving the plaintiff's apartment complex intruded onto the defendant's property,but that the plaintiff hada prescriptive easement over the defendant's land. Zavarelli,749 P.2d at 526. On appeal we reversed and remanded the district court's decision finding that aprescriptive easement could not be supported. Zavarelli, 749 P.2d at 527. On remand, the district court made no further findings of fact, but did make additional conclusions of law that as a result of mutual mistake in the boundary line the plaintiff did have a property right in the land where the septic tank was located. Zavarelli, 779 P.2d at 492. The defendant appealed alleging that the district court erred in allowing a new affirmative defense of mutual mistake. Zavarelli, 779 P.2d at 492. ThisCourt determinedthat althoughthe doctrine of lawof the

case precluded the district court on remand from determining as a matter of law that theplaintiffhad aprescriptive easement inthe defendant's property, it did not,preclude the district court from reaching a different conclusion of lawbased on the factswhich it had already found. Zavarelli,779 P.2d at 493. (Emphasisadded.) When a case is reversed and remanded for furtherproceedings, the issuesare generallyopen on a retrial. Zavarelli,779 P.2d at 493. However the trial court is not free to ignore themandate and opinion of the reviewingcourt,but must proceed in conformity with theviews expressedby the appellate court. Zavarelli,779 P.2d at 493. On remand, the trial court may consider or decide any matters left openby the appellate court, and is free to make any order or direction in further progress of the case,not inconsistentwith the decisionof the armellate court, as to any question not presented or settled by such decision. (Emphasisadded.)zavarelli, 779 P.2d at 493. In Haines I, we affirmed Judge Olson's findings and conclusions inall respects except as to thematter of the award of $50,000compensatory damages (Haines

### I

## -- issue 111) and except as to the court's leqal conclusion, based on pre-storv law, that a breach of the covenant of good faith and fair dealing was a sufficient basis on which to award punitive damages (Haines I 

## -- issue IV)

# . We did not disagree with or reverseJudgeOlson's findings of fact on which he awarded punitive damages. In fact, we concluded that the issues of fraud and the breach of the covenant of good faithand fair dealing asapplied in this case tobe "inextricably intertwined." Haines, 830 P.2d at 1240. We simply held that between the time the parties litigated through the trial and the time the casewas ready fordecisionon appeal, we changed the law, and that on the basis of the changed law, punitive damages could not be awarded on the basis of the then existing record,without 

## more. Our singularpurpose on remand was to allow the parties to plead, prove, argue anddefend against the "withoutmore,"that is, to: 1) allow Haines to amend itspleadings to allege the necessary legal basis (fraud,constructive fraud, or other theory) to prove punitive damages under Storv; 2) to allow MPC to amend its pleadings to assert fraud, constructive fraud, or other punitive damages defenses; and, 3) to allow the district court to determine whether Judge Olson's findings and conclusions, alone or with additional evidence on the new theories justified an award ofpunitive damages. We did 

### not reverse and remand for a whole new or de 

### novo trial. To the contrary, under the posture of the case on the limited remand ordered, once the parties amended their pleadings, the District Court was limited: 1) to determining, on the basis of Judge Olson's findings and conclusions,whether punitive damages were justified on the basis of any new theory plead (i.e.

## , was Haines entitled to summary judgment simply on the basis of Judge Olson's findings and conclusions); 2) if not, to accepting additional evidence in support of and against the new lesal theorieswled, and tomaking additional findingson the additional evidenceasregardsthenew legaltheories;3) tomaking additional conclusions of law on whether Judge Olson's findings, along with the new findings,justified an award of punitive damages under

### the new leaal theories pled; and, 4) if punitive damages were justified, to determining the amount thereof. In Story

### v. City of Bozeman (1993),259 Mont 207, 230-31, 856 P.2d 202, 216 (Story11)

## ,wedifferentiated between a case where we remand for a new trial without saving certain portions of the judgment (i.e. a trial de 

### novo) and a case where we remand with limiting instructions. Our remand in Haines Iwas of the latter type and not the former. It was error for the District Court in Haines I1 to disregardJudge Olson's findings and conclusions from Haines 

### I concerning the breach of the covenant of good faith and fair dealing which we affirmed on appeal. The findings and conclusions in Haines I that MPC misledHaines into extending the letter of credit,that MPC's conductwas oppressive and constituted implied malice, and that MPC breached. the covenant of good faith and fair dealing, all stand as the law of the case, and the District Court was in error to disregard and contravene those in Haines 11. On remand, the District Court must consider the claim for punitive damages based on the new theories pled and on any additional evidence received in Haines 11; it is not, however, at liberty to disregard or contravene Judge Olson's findings and conclusions in reaching its decision. REVERSED and REMANDED for this opinion.

We Concur:

Justice Karla M. Gray did not participate in this opinion.