Imagine that your client has filed a straightforward motion that is critical to its position. Then imagine that the judge hearing the motion is involved in personal litigation where he is facing the same issue and arguing exactly what your opponent is arguing. Then imagine that the judge has not bothered to disclose the fact of that litigation or the underlying circumstances that constitute a serious conflict of interest. That very circumstance is what was facing Hogan Lovells’ client, New York Marine and General Insurance Company.
In litigation in state court in Montana, a cattle ranching operation sued New York Marine’s policyholder, an accountancy firm called Junkermier, Clark, Campanella, Stevens, P.C. (“JCCS”), for professional negligence, breach of fiduciary duty, breach of contract, bad faith and fraud. Pursuant to the terms of its professional liability insurance policy, New York Marine defended JCCS for nearly six years against those claims. JCCS repeatedly expressed its approval and appreciation of its defense counsel’s vigorous efforts. Nevertheless, on November 12, 2014 — on the eve of the hearing on five motions for summary judgment filed by JCCS’s defense counsel and against defense counsel’s recommendation — JCCS stipulated to a $10,000,000 confessed judgment and assigned any rights it had against New York Marine to the claimants (who, in turn, agreed not to enforce the judgment against JCCS and to pursue New York Marine for the $10 million instead). New York Marine was not included in the negotiation of this settlement and certainly did not approve it, as required by the terms of its insurance contract.
New York Marine immediately sought to intervene in the action and requested leave to conduct discovery regarding the reasonableness of the stipulated settlement, which was 40 times greater than defense counsel’s estimation of damages. New York Marine made it clear to the state court, the Honorable Judge Huss (now retired) presiding, that the confessed judgment was not reasonable given the facts of the case. Judge Huss allowed New York Marine to intervene in the action on the day that the reasonableness hearing was to be held, denied New York Marine’s request for limited discovery and a continuance of the hearing and rubber-stamped the confessed judgment that same day. The claimants are currently attempting to enforce that judgment against New York Marine in federal court in Montana.
Hogan Lovells subsequently learned that Judge Huss had been sued by his former court reporter for sexual harassment in February 2014. Montana’s Office of Court Administration (“OCA”) acted as Judge Huss’ insurer and provided a defense for him against the court reporter’s claims. Eight months later, and without the OCA’s participation or approval, Judge Huss settled the claims against him for $744,371 and assigned his rights against the OCA to the court reporter (who agreed not to enforce that settlement against Judge Huss in his personal capacity). He also agreed to “cooperate” with the court reporter in executing the judgment against the OCA. The OCA promptly filed a declaratory relief action that disputed its obligation to pay for Judge Huss’ settlement and also challenged the reasonableness of the settlement. The OCA’s lawsuit against Judge Huss was filed just four days after JCCS and the claimants entered into their confessed judgment and just two weeks before New York Marine sought to intervene in the underlying action to challenge the reasonableness of the confessed judgment.
New York Marine had no reason to know about this conflict of interest because it was never disclosed. The only reason it came to light was because Judge Huss sent a resignation letter to the Montana Supreme Court in April 2015 that Hogan Lovells able to obtain. Upon further investigation, Hogan Lovells learned about the conflict of interest and began formulating an appeal for its client. One of the major challenges New York Marine faced was locating suitable local counsel who was willing to assist in bringing these admittedly uncomfortable facts to light. A number of firms that originally agreed to take on the case withdrew after learning that Hogan Lovells believed it was necessary to make these arguments.
New York Marine filed its appeal with the Montana Supreme Court in October 2015 and argued, among other things, that the order denying its request for limited discovery and the judgment against JCCS were void because the district court failed to disclose a material conflict of interest. On May 3, 2016, the Montana Supreme Court issued its opinion and order (see Draggin’ Y Cattle Co., et al. v. Addink, et al., 2016 MT 98, ___ Mont. ___ (Case No. DA 15-0354) and “conclude[d] that the presiding judge should have disclosed circumstances that could potentially cause the judge’s impartiality reasonably to be questioned.” The court held that the district court’s apparent conflict of interest did not stem from an “average personal experience,” as the appellees urged, and that:
Only a few weeks before [the appellees] entered into their stipulated settlement, Judge Huss entered into a stipulated settlement stemming from a lawsuit against him individually. A month before Judge Huss held a hearing to determine the reasonableness of the stipulated settlement at issue here, the OCA — which acted as an insurer by paying for Judge Huss’s defense — filed a complaint in which it claimed that Judge Huss’s personal stipulated settlement was unreasonable. In other words, Judge Huss presided over a hearing in which an insurer questioned the reasonableness of a stipulated settlement while the reasonableness of his own personal stipulated settlement was being questioned by his insurer. The timing and nature of the circumstances reasonably raise concerns regarding Judge Huss’s ability to maintain “an open mind in considering” the reasonableness of the stipulated settlement at issue here. [Citation omitted.] Accordingly, Judge Huss’s “impartiality might reasonably be questioned” under Rule 2.12(A). We conclude that, under these circumstances, Judge Huss was required to disclose his participation in his personal stipulated settlement to the parties under Rule 2.12(C) because the circumstances might lead to reasonable questions regarding Judge Huss’s impartiality.” (Emphasis added.)
The Montana Supreme Court remanded the action for an evidentiary hearing regarding Judge Huss’ apparent conflict of interest and a determination of whether — consistently with its conclusion — Judge Huss should have been disqualified on the basis of his undisclosed conflict. If the state court confirms the Montana Supreme Court’s conclusion, any orders that Judge Huss entered after he should have disqualified himself will be void as a matter of law, including the order entering the confessed judgment.