Opinion ID: 1259048
Heading Depth: 2
Heading Rank: 1

Heading: Binding Nature of the Order in the Subsequent Bad Faith Action

Text: This Court has consistently held that a circuit court has the authority to enforce a settlement agreement through a party's motion to compel enforcement. As this Court found in Moreland v. Suttmiller, 183 W.Va. 621, 397 S.E.2d 910 (1990), where the underlying record provides sufficient evidence of intent to enter into settlement agreements and authorization to attorneys to do so, a court's decision to enforce the agreement will not be overturned. The Moreland Court explained as follows: On the whole, we believe that the evidence shows that settlement agreements were culminated between the appellants and both appellees. We base our conclusion in part on the Morelands' written and oral communications with their counsel and the court. Id. at 625, 397 S.E.2d at 914. Evidence indicating the culmination of settlement negotiations was also addressed by this Court in F.S. & P. Coal Co. v. Inter-Mountain Coals, Inc., 179 W.Va. 190, 366 S.E.2d 638 (1988). In F.S. & P., this Court found no evidence in the record to contradict the circuit court's ruling that the compromise and settlement agreement entered into by the parties was a valid and binding contract of settlement. 179 W.Va. at 192, 366 S.E.2d at 640. As a guiding axiom, this Court has held that [t]he law favors and encourages the resolution of controversies by contracts of compromise and settlement rather than by litigation; and it is the policy of the law to uphold and enforce such contracts if they are fairly made and are not in contravention of some law or public policy. Syl. Pt. 1, Sanders v. Roselawn Memorial Gardens, Inc., 152 W.Va. 91, 159 S.E.2d 784 (1968); see also Board of Educ. of Monongalia County v. Starcher, 176 W.Va. 388, 343 S.E.2d 673 (1986); Daily Gazette Co., Inc. v. Canady, 175 W.Va. 249, 332 S.E.2d 262 (1985); State ex rel. Vapor Corporation v. Narick, 173 W.Va. 770, 320 S.E.2d 345 (1984). The primary issue in the case presently before this Court is whether the findings of fact and conclusions of law contained in the lower court's August 25, 2006, order will be deemed binding upon TIG in the subsequent bad faith action. During oral argument of this matter, counsel for TIG represented that TIG was not necessarily attempting to dismantle the entire settlement agreement; it has agreed to the payment of the settlement limits of $500,000.00 and has in fact paid such amount, notwithstanding its objection to the $1.5 million judgment confessed by Mr. Galloway. It simply seeks protection from the far-reaching effects of the underlying order to the extent that such findings may be deemed to bind TIG in the bad faith action yet to be litigated. Our analysis of this issue is predicated upon the principle that the issues to be addressed in the bifurcated bad faith action are separate questions, dependent only in part upon the underlying facts found by the lower court. As aptly recognized by the Kansas court in Bridges for Bridges v. Bentley by Bentley, 716 F.Supp. 1389 (D.Kan. 1989), the bad faith cause of action is a suit involving a new party and litigating the existence of a new liability. 716 F.Supp. at 1392. Collateral estoppel principles obviously remain in effect. However, application of such principles is improper where the party against whom they are asserted did not have a full and fair opportunity to litigate the issues involved. As this Court explained in syllabus point one of State v. Miller, 194 W.Va. 3, 459 S.E.2d 114 (1995), Collateral estoppel will bar a claim if four conditions are met: (1) The issue previously decided is identical to the one presented in the action in question; (2) there is a final adjudication on the merits of the prior action; (3) the party against whom the doctrine is invoked was a party or in privity with a party to a prior action; and (4) the party against whom the doctrine is raised had a full and fair opportunity to litigate the issue in the prior action. See also Holloman v. Nationwide Mut. Ins. Co., 217 W.Va. 269, 617 S.E.2d 816 (2005); Haba v. Big Arm Bar and Grill, Inc., 196 W.Va. 129, 468 S.E.2d 915 (1996). In syllabus point eight of Conley v. Spillers, 171 W.Va. 584, 301 S.E.2d 216 (1983), this Court emphasized: A fundamental due process point relating to the utilization of collateral estoppel is that any person against whom collateral estoppel is asserted must have had a prior opportunity to have litigated his claim. In the present case, TIG was not permitted to participate in the settlement enforcement hearing and thus cannot be deemed to have had a full and fair opportunity to litigate the issue. More specifically, the order in question expressly declares that TIG will have the opportunity to challenge the $1.5 million confessed judgment by Mr. Galloway. This case presents the classic tripartite configuration in which a party to a bifurcated bad faith action was not a party in the underlying action, despite the reality that such entity furnished counsel for the defendant in that underlying action. The fact remains that Mr. Wilmoth, as counsel for Mr. Galloway hired through TIG, was not protecting the interests of the insurance company, TIG, while the settlement negotiation matters were being litigated in the lower court. His duties as counsel ran solely to the interests of Mr. Galloway. We find that the court entertaining the bifurcated bad faith action will be required to determine the admissibility of the August 25, 2006, order at issue in this appeal. If admitted in that forum, the order and any part of it will be subject to challenge by TIG, as specifically stated in the order. The fact that the defendant, Mr. Galloway, was willing to confess judgment of $1.5 million may indeed constitute admissible evidence in the bad faith action, but it does not foreclose his insurer, TIG, from challenging that issue or its relevance in whole or in part in the bifurcated bad faith action. TIG properly reserved the right to object to the consent judgment beyond policy limits, and the lower court recognized and incorporated that right to object into the stated findings of the order. An insurer's right to challenge a judgment to which an insured has confessed was addressed by the Colorado Court of Appeals in Ross v. Old Republic Insurance Co., 134 P.3d 505 (Colo.App.2006). [6] The court found that such challenge was not prohibited as an improper collateral attack. The Ross court explained that the insurer, similar to TIG in this instance, was not a party to the confessed judgment and had not agreed to be bound by the judgment. The Ross court held as follows: A consent judgment is distinguishable in some respects from a judgment resulting from contested litigation carried to conclusion by judicial determination. A consent judgment is not a judicial determination of any litigated right, and it is not the judgment of the court, except in the sense that the court allows it to go upon the record and have the force and effect of a judgment. 134 P.3d at 511. The consent judgment in Ross was also entered into without the participation of parties with incentive to protect the insurer's interests. The Ross court recognized: When dealing with consent judgments, courts must ensure that circumstantial guarantees of trustworthiness exist concerning the genuineness of the underlying judgment. The real concern is that the settlement may not actually represent an arm's length determination of the worth of the plaintiff's claim. When the insured actually pays for the settlement of the claim or when the case is fully litigated, the amount of the settlement or judgment can be assumed to be realistic. However, the settlement amount in a consent judgment with a covenant not to execute is more suspect. Id. at 511-12. The Ross court examined the conflicting interests of the parties to the agreement, reasoning as follows: [T]he parties, none of whom had an incentive to represent or protect Old Republic's interests, determined the amount of the judgment to be collected against Old Republic. Unlike a judgment entered by a neutral fact finder, the consent judgment here was entered by parties whose incentive was to pursue an action against Old Republic, which was not a party to the judgment. Id. at 512 (internal quotations omitted). The Ross court explained that [l]egal maneuvering, under which the stipulation becomes a judgment, should not permit the accomplishment by indirection of that which could not be done directly. Id. (quoting Marsh v. Warren, 126 Colo. 298, 248 P.2d 825, 828 (1952)); see also Insurance Co. of North America v. Whatley, 558 So.2d 120 (Fla.Dist. App.1990) (holding that factual determinations made during prior adjudication are not binding on insurer in subsequent adjudication concerning coverage, where interests of insured and insurer are antagonistic in initial tort adjudication with third party); Davin v. Athletic Club of Overland Park, 32 Kan. App.2d 1240, 96 P.3d 687, 691 (2004) (holding that liability insurer severed privity with insured by hiring attorney to defend insured under reservation of rights, and, thus, consent judgment against the insured had no collateral estoppel effect in judgment creditor's garnishment action against the insurer, holding that [p]arties to litigation cannot concoct a scheme agreeing to a declaration of negligence and a $300,000 judgment and then expect the insurance company to be bound by that agreement without being able to defend itself against the liability.). Based upon the foregoing, we hold that a consent or confessed judgment against an insured party is not binding on that party's insurer in subsequent litigation against the insurer where the insurer was not a party to the proceeding in which the consent or confessed judgment was entered, unless the insurer expressly agreed to be bound by the judgment. Therefore, an attack on the consent or confessed judgment in the subsequent litigation by an insurer who did not expressly agree to such judgment is a permissible direct, not collateral, attack on the consent or confessed judgment. In the present case, since the lower court bifurcated the bad faith portion of the underlying claim and has not yet entered into litigation of that matter, it is not within the province of this Court to address additional matters which might become pertinent in the bad faith claim. [7] The primary issue to be resolved in this appeal is the extent to which the specific August 25, 2006, order under inquiry may be utilized against TIG when the bifurcated bad faith claim is ultimately litigated. [8] Thus, subsequent to the filing of this opinion, the lower court will progress forward on the course it previously set, dissolving the stay and proceeding with discovery on the bad faith claim. Within the litigation of the bad faith claim, the issue of attorney-client privilege will be addressed. In this appeal, TIG contends that the lower court erred in approving the portion of the settlement which permitted Mr. Galloway to waive his rights to assert his attorney-client privilege. TIG is concerned that the order might thereby be interpreted to also waive TIG's attorney-client privilege to certain pre-settlement documents. In State ex rel. Allstate Insurance Co. v. Gaughan, 203 W.Va. 358, 508 S.E.2d 75 (1998), this Court explained that an insurer may assert quasi attorney-client privilege to communications in the insured's file in a third-party bad faith action even where an insured has signed a release of his claim file. All communications in an insured's claim file generated on and after the filing date of a third-party's complaint against an insured, are presumptively quasi attorney-client privilege communications. 203 W.Va. at 373, 508 S.E.2d at 90. The quasi attorney-client privilege belongs to the insurer, not the insured, and may be waived only by the insurer. Id. at 372, 508 S.E.2d at 89. [9] In State ex rel. Brison v. Kaufman, 213 W.Va. 624, 584 S.E.2d 480 (2003), this Court decided that, within the context of a first-party bad faith action against an insurer, the attorney-client privilege and work product rule attach to documents contained in an insured claim file and litigation file. Syllabus point seven of Brison explained: Where the interests of an insured and his or her insurance company are in conflict with regard to a claim for underinsured motorist coverage and the insurance company is represented by counsel, the bringing of a related first-party bad faith action by the insured does not automatically result in a waiver of the insurance company's attorney-client privilege concerning the underinsurance claim. This Court also examined the nature of attorney-client privilege conflicts within the bad faith context in State of West Virginia ex rel. Allstate Ins. Co. v. Madden, 215 W.Va. 705, 601 S.E.2d 25 (2004). In that case, this Court recognized that even [i]f the materials sought to be protected from disclosure do not satisfy the criteria necessary for the assertion of the attorney-client privilege, they nonetheless may be insulated from discovery by resort to the work product doctrine. 215 W.Va. at 714, 601 S.E.2d at 34. This Court finds that the waiver of attorney-client privilege to which the order refers impacts only the privilege Mr. Galloway would be entitled to assert on his own behalf. It will not affect TIG's rights to assert any attorney-client privilege belonging to TIG or to protect attorney-client product to the extent that TIG may independently assert such rights. Moreover, the lower court may, upon proper application, require a privilege log to be filed describing the nature of the documents or communications which may be deemed privileged, and the court may then properly assess the applicability of the alleged privilege.