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: 

Bruce R. 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 I and affirmed on appeal to determine 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 

(hereinafter Haines 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 

2 
springs to Cut Bank, Montana. In lieu of a construction bond, the 

parties required Haines to post an irrevocable letter of credit in 

the amount of $750,000 in favor of MPC, and to maintain such letter 

of credit until final acceptance and payment of the work under the 

contract. 

Construction of the pipeline required that Haines weld 

sections of the pipe in accordance with procedures developed by MPC 

and in compliance with federal regulations. No welds were buried 

unless they had been inspected and approved by MPC and Gamma Sonics 

(Gamma), a company hired by MPC to provide X-ray inspection of the 

welds. 

The project had regulatory problems 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 safety violations, regarding primarily 

the padding of the bed underneath the pipeline. To avoid further 

hearings, MPC developed a atplan to demonstrate fitness for service" 

of the portion of the pipeline that had been constructed and 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 the 
X-ray inspection of Gamma. Haines and MPC entered into a second 

contract on May 8, 1984, whereby Haines was to assist MPC in doing 

miscellaneous repair work on the completed portion of pipeline 

including repair of buried pipeline identified by SRI as defective. 

Under this contract Haines was paid as an 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. The memorandum indicated 

that MPC would 81move ~aines off the jobw by mid-November. 

Furthermore, the memorandum indicated that the letter of credit was 

set to expire on November 15, and that the circumstances 

surrounding repair work were being reviewed to determine if claims 

should be made against Haines. 

On October 22, 1984, ~aines as a "good faith gesture" extended 

the letter of credit until 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 the pipeline 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. It was later determined that Gamma 

had insufficient assets to pursue. 

In January of 1985, MPC retained a law firm to advise the 
company 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 credit which was due to expire Wednesday, May 15. Gannon 

concludedthatthe costs of repairing the welds would 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 failed to perform proper welding under 

the contract. Haines responded stating that it had no further 

responsibility for the welds once they had been X-rayed, approved, 

and the pipe buried. 

Haines initiated an action in the Second Judicial District 

Court, Silver Bow County to recover damages against MPC for breach 

of the construction contract. After a bench trial the District 

Court entered its findings and conclusions. The court ruled that 

MPC had accepted Hainesl work, 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 concluded that MPC misled Haines into extending 
the 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 their pleadings. 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 for breach of the covenant of good faith 

and fair dealing, absent a special relationship. We allowed the 

parties to amend their pleadings to allege fraud, or other theories 

consistent with our decision in Haines I. 

Following the 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 evidence produced in support 

of the Second Amended Complaint. The District Court 

found for Plaintiff and the Supreme Court affirmed there 

was a Breach of the Covenant of Good Faith and Fair 

~ealing and consequently a Breach of the Contract. The 
Ð in dings and Conclusions of Judge Olson are the law of 

that case. (Emphasis added.) 

The District Court went on to state, 

this Court feels that this matter should be tried de novo 

to determine if Fraud or Constructive Fraud did in fact 

exist. (Emphasis in original.) 

The District Court retried the case and found that Haines had 

failed to prove either actual or constructive fraud. In doing so, 

the District Court made findings directly contrary to the findings 

of fact and conclusions of law in Haines I, which were affirmed by 

this Court. On August 9, 1993, judgment was entered in favor of 

MPC and against Haines on all claims set forth in its Third Amended 

Complaint. Haines appeals from this judgment. 

Haines contends that the District Court failed to properly 

apply the doctrines of collateral estoppel and law of the case when 

it made findings which were directly contrary to the findings in 

Haines I. We address each doctrine in turn. 

I. COLLATERAL ESTOPPEL 

The doctrine of collateral estoppel is similar to the doctrine 

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 estoppel bar 

extends to all questions essential to the judgment which were 

determined by a prior judgment. m, 833 P.2d at 151. 

7 
It 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), 207 Mont. 409, 413, 673 P.2d 1277, 1279; In re Marriage of 

Stout (1985), 216 Mont. 342, 349-50, 701 P.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 in privity with a party to 

the prior adjudication? 

w, 673 P.2d at 1279. 

In determining whether collateral estoppel applies, 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 is not 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 first prong of the three part test 
is met in this case. 

The term "issue" does not equate with the elements of a cause 

of action. This Court has previously declared that "[tlhe bar that 

arises from collateral estoppel extends to all questions essential 

to the judgment and actively determined by a prior valid 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 or necessarily decided in a prior 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 it despite the fact 

that it was not in fact expressly pleaded or otherwise 

urged." (Citations omitted.) 

Vol. lB, Moore's Federal Practice 9 0.443[2], at 760. 

In this case Haines originally pled 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 

found by Judge Olson, the willful conduct of MPC in enticing 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 

9 
credit. 

Moreover, because this Court affirmed the findings and 

conclusions of the District Court regarding MPCJs actions 

surrounding the extension of the letter of credit, we also conclude 

that there was a final judgment on the merits as to that issue and 

that the second prong of the test is thus satisfied. Finally, the 

third prong is clearly satisfied as Haines advanced its claims 

against MPC 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 facts and conclusions issued by the District Court in Haines I 

which we affirmed on appeal. The rule of law of the case provides 

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 pronouncement becomes the law of the case, and must 

be adhered to throughout its subsequent proceedings, both in the 

trial court and upon subsequent appeal. Zavarelli v. Might (1989), 

239 Mont. 120, 124, 779 P.2d 489, 492. 

The plaintiff in Zavarelli, originally brought an action 

attempting to enjoin his sister from destroying or interfering wit:. 

a sewer system. Zavarelli v. Miqht (l988), 230 Mont. 288, 749 P.23 

524. The district court in the first proceeding found that part o: 

the septic system serving the plaintiff's apartment complex 

intruded onto the defendant's property, but that the plaintiff had 
a 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 a prescriptive 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. 

This Court determined that although the doctrine of law of the 

case precluded the district court on remand from determining as a 

matter of law that the plaintiff had a prescriptive easement in the 

defendant's property, it did not, preclude the district court from 

reaching a different conclusion of law based on the facts which it 

had already found. Zavarelli, 779 P.2d at 493. (Emphasis added.) 

When a case is reversed and remanded for further proceedings, 

the issues are generally open on a retrial. Zavarelli, 779 P.2d at 

493. However the trial court is not free to ignore the mandate and 

opinion of the reviewing court, but must proceed in conformity with 

the views expressed by the appellate court. Zavarelli, 779 P.2d at 

493. 

On remand, the trial court may consider or decide any 

matters left open by the appellate court, and is free to 

make any order or direction in further progress of the 

case, not inconsistent with the decision of the armellate 

court, as to any question not presented or settled by 

such decision. (Emphasis added.) 
zavarelli, 779 P.2d at 493. 

In Haines I, we affirmed Judge Olson's findings and 

conclusions in all respects except as to the matter of the award of 

$50,000 compensatory 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 reverse Judge Olson'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 

faith and fair dealing as applied in this case to be "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 case was ready for decision on 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 singular purpose on remand was to allow the parties to 

plead, prove, argue and defend against the "without more," that is, 

to: 1) allow Haines to amend its pleadings 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 of 
punitive 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 

theories wled, and to making additional findings on the additional 

evidence as regards the new legal theories; 3) to making 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 (Story 11) , we differentiated 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 I was of the latter 

type and not the former. It was error for the District Court in 

Haines I1 to disregard Judge 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 misled 
Haines into extending the letter of credit, that MPC's conduct was 

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.