Opinion
No. 2015-CV-00488
11-08-2017
Michael Coutu v. The State of New Hampshire, Bureau of Securities Regulation
ORDER
The Plaintiff, Michael Coutu ("Coutu"), has brought an action against the State of New Hampshire ("the State") seeking payment pursuant to a consulting agreement ("the Agreement") he entered into with the State to perform services for the New Hampshire Bureau of Securities Regulation ("the BSR"). The case was tried without a jury. For the reasons stated in this Order, the Court finds that the State is liable to Coutu for breach of contract and Coutu is entitled to contract damages in the amount of $23,146.26. The Court finds for Coutu on the State's counterclaims for breach of contract and breach of the implied covenant of good faith and fair dealing, as the State has introduced no evidence that Coutu breached the Agreement or the implied covenant. Moreover, Coutu is entitled to his reasonable attorney's fees, as he was forced to litigate against an opponent whose position is patently unreasonable. Within 30 days of the date of the Clerk's Notice of this Order, Coutu shall submit his fees and costs for approval. The State shall have 10 days to object. In light of this disposition, the Court does not reach Coutu's fraud claim.
I
While the facts and circumstances surrounding the execution of the Agreement between Coutu and the State are complicated, the issues in this case are not. This case arises from the relationship of the Local Government Center, Inc. ("LGC") and certain affiliated associations, Health Trust ("HT"), the Property Liability Trust ("PLT"), and the Workers' Compensation Trust ("WC Trust"). These three entities are pooled risk management programs. They provide services to municipalities and are alternatives to traditional, single employer insurance programs. Essentially, they function as mutual insurance companies with the net assets of each program considered the property of its respective members. Earnings and surplus of each trust are determined annually at the end of the coverage year by subtracting certain expenditures from the program's total revenue, which consists of income from investments and combined premiums paid by the program's members.
The relevant facts are taken from Appeal of Local Gov't Ctr., 165 N.H. 790 (2014). --------
Until 2003, HT, PLT and WC Trust operated as organizations separate from each other and from LGC. Each organization had its own corporate bylaws and its own board of directors. In 2003, LGC took control of the assets of HT, PLT, and WC Trust, and sometime thereafter, LGC eliminated the separate boards that previously governed these entities. After 2003, a single board of directors governed LGC, HT, PLT and WC Trust. In effect, after the 2003 reorganization, LGC became the "parent" to its "subsidiaries," HT, PLT, and WC Trust. In 2007, LGC merged WC Trust with PLT.
Historically, WC Trust had collected insufficient insurance premiums to cover its cost. To remedy this problem, beginning with the 2003 reorganization, LGC transferred funds from HT and PLT to WC Trust. Between 2003 and 2010, LGC transferred approximately $18.3 million from HT to WC Trust. After the BSR investigated this practice, the LGC board voted to execute a promissory note for approximately $17.1 million payable to HT, although the board made the note interest-free.
In 2011, the BSR initiated agency litigation against these entities based on the alleged failure to comply with RSA 5-B which requires that pooled risk management organizations, among other things, be governed by their own board of directors and bylaws, and "return all earnings and surplus in excess of any amounts required for administration, claims, reserves, and purchase of excess insurance to the participating political subdivisions." See RSA 5-B:5, I(b), (c), (e). In early 2012, Coutu began assisting the BSR as a consultant; first for no compensation and then as the BSR's retained expert during litigation. After litigation concluded, Coutu continued working for the BSR on a pro bono basis until the parties executed the consulting agreement ("the Agreement") on September 9, 2014.
During the litigation, the presiding officer found that the 2003 reorganization violated RSA 5-B:5 in numerous ways. To remedy the violations, the presiding officer ordered LGC to organize HT and PLT into a form that provides each program with an independent board and its own set of written bylaws. The presiding officer also ordered HT and PLT to return excess funds from 2010 to their respective political subdivision members by September 1, 2013. He further ordered PLT to satisfy the previously executed promissory note, by December 1, 2013, by transferring $17.1 million to HT, as repayment for the subsidy HT provided WC Trust over the years.
The presiding officer's lengthy order was appealed to the New Hampshire Supreme Court which affirmed in part, vacated in part, and remanded. See Appeal of Local Gov't Ctr., 165 N.H. 790 (2014). Upon remand, the parties entered into a Consent Decree, which was approved by the hearing examiner on July 25, 2014. The Consent Decree, which gave the BSR the right to an on-site liaison to ensure that the Consent Decree was complied with, provided, in relevant part:
For a period of twelve (12) months from the date of this Consent Decree, the BSR shall be entitled to have a Liaison, of its own choosing, on-site at both PLT and HT's business location. The function of the Liaison will be to assess, liaise and inform the BSR director of the business operations and activities of HT and PLT. The Liaison shall perform his duties in a professional and constructive manner. The Liaison shall be entitled to reasonable access to both PLT's and HT's executive directors, chief financial officers, chief operating officers, risk pool manager in charge of rate setting, outside actuaries, and external auditors in a non-disruptive manner. The Liaison shall not engage the outside actuaries and external auditors without the participation of the CFO, in the case of the auditors, and both the CFO and the Risk Pool Administrator, in the case of the actuaries, of the applicable risk pool. . . . The purpose of the Liaison's record requests shall be to assess the current and prospective operations of the applicable risk pool.(Pl.'s Ex. 1 [hereinafter "Consent Decree"] ¶ 9.)
Because Coutu was a recognized expert in the operation and runoff of insurance companies, the BSR sought his services to serve as the liaison. On September 9, 2014, Coutu and the BSR entered into the Agreement, which was called a "Contract for Consulting and Advisory Services" and printed on form number P-37. (See Pl.'s Ex. 2 [hereinafter "Agreement"].) The scope of consulting services to be performed by Coutu was described in Exhibit A to the Agreement. Specifically, Exhibit A provided that Coutu was required to "provide the following services under the direction of the Secretary of State and Director of the Bureau of Securities Regulation":
[1.] Act as a liaison between the N.H. Department of State, Bureau of Securities and HT, and Property Liability Trust, monitoring both risk pool's compliance with and implementation of all administrative orders and decrees issued or approved by the hearings officer in the matter of Bureau of Securities Regulation v. Local Government Center, Inc. et al[;]
[2.] Attend and participate at committee and board level meetings of said
risk pools[;](Agreement Ex. A.)
[3.] Analyze business processes, methodologies and practices[;]
[4.] Present findings, analyses and recommendations[;]
[5.] Assist the Bureau of Securities during meetings and hearings[; and]
[6.] Conduct similar in-depth financial analysis of other New Hampshire pooled risk management programs as directed by the Secretary of State or Director of the Bureau of Securities Regulation.
The Agreement provided that Coutu would be paid up to $180,000 for his consulting services. (Agreement Ex. B.) In addition, the Agreement was explicit about Coutu's role:
CONTRACTOR'S RELATION TO THE STATE. In the performance of this Agreement the Contractor is in all respects an independent contractor, and is neither an agent nor an employee of the State. Neither the Contractor nor any of its officers, employees, agents or members shall have authority to bind the State or receive any benefits, workers' compensation or other emoluments provided by the State to its employees.(Agreement ¶ 11.)
Coutu performed the work he agreed to do under the Agreement. Indeed, Barry Glennon, Director of the BSR ("Director Glennon"), was unequivocal in his testimony that Coutu performed as required and that his expertise was critical to the BSR in carrying out its oversight of the Consent Decree. The State introduced no evidence at trial that Coutu's work was not satisfactory. However, the State refused to pay Coutu's last invoices of some $23,146.26. (See Pl.'s Ex. 66.) When Coutu brought suit to recover the amount of money he had earned, the State brought a counterclaim raising a number of allegations and seeking repayment of all funds Coutu had received under the Agreement.
II
A
The State has made a shifting constellation of arguments to avoid paying Coutu the money he earned. In moving for summary judgment, the State alleged that Coutu had a fiduciary obligation to the State as a result of the Agreement the parties entered into. Such an obligation is nowhere specified in the Agreement itself; rather, the Agreement is a form contract the State uses for independent contractors. (See Agreement at 1 ("FORM NUMBER P-37").) The State relied on Reinhold v. Mallery, 135 N.H. 31, 34 (1991), for the proposition that an agent assumes an obligation as a fiduciary. The Court rejected the State's argument because Reinhold involved a real estate brokerage contract and such contracts often contain language suggesting that the broker will act as a fiduciary to the customer. See (Mar. 30, 2017, Order at 2.) That independent contractors, such as insurance brokers do not, absent some language binding themselves, assume a fiduciary obligation to their customers is evidenced by cases like Clark & Lavey Benefits Solutions v. Educ. Dev. Ctr., 157 N.H. 220, 227 (2008). And of course the A greement specifically provides that Coutu is not an agent of the State.
The State has now abandoned that argument, but alleges despite the explicit language of the Agreement providing that Coutu "is in all respects an independent contractor," Coutu was an agent of the State and therefore owed the State extra contractual obligations. For this extraordinary proposition, the State relies on Herman v. Monadnock PR-24 Training Council, which stands for the unremarkable proposition that "[a]n agency relationship, or lack thereof, does not turn solely upon the parties' belief that they have or have not created one," but that an agency relationship can be created by the conduct of the parties. 147 N.H. 754, 758-59 (2002). This argument fares no better than the first; this principle has no relevance to a case in which sophisticated parties draft an agreement clearly defining their rights and obligations and specifically stating that one shall not be the agent of the other at least as to obligations inter se.
Coutu was merely an independent contractor with defined duties, which are set forth in the "Scope of Work" as described in Exhibit A to the Agreement. There is no showing by the State that the Agreement was ambiguous. Coutu's duties are defined by the Agreement, and whether or not he violated the Agreement is the contested issue of fact.
B
Lacking any specific authority to support the actions the BSR took in this case—deciding that it would no longer pay Coutu's invoices after March 27, 2015, while still requesting services from him—the State argues it need not pay Coutu because he breached his obligations under the implied covenant of good faith and fair dealing.
The implied covenant of good faith and fair dealing is a part of every contract. Livingston v. 18 Mile Point Drive, Ltd., 158 N.H. 619, 624 (2009). The law is well settled that:
[U]nder an agreement that appears by word or silence to invest one party with a degree of discretion in performance sufficient to deprive another party of a substantial proportion of the agreement's value, the parties' intent to be bound by an enforceable contract raises an implied obligation of good faith to observe reasonable limits in exercising that discretion, consistent with the parties' purpose or purposes in contracting.
Centronics Corp. v. Genicom Corp., 132 N.H. 133, 143 (1989). To determine whether a party has exceeded the limits of permissible discretion, the Court must consider four questions:
1. Does the agreement ostensibly allow to or confer upon the defendant a
degree of discretion in performance tantamount to a power to deprive the plaintiff of a substantial proportion of the agreement's value? . . .Id. at 143-44.
2. If the ostensible discretion is of that requisite scope, does competent evidence indicate that the parties intended by their agreement to make a legally enforceable contract? . . .
3. Assuming an intent to be bound, has the defendant's exercise of discretion exceeded the limits of reasonableness? . . .
4. Is the cause of the damage complained of the defendant's abuse of discretion, or does it result from events beyond the control of either party, against which the defendant has no obligation to protect the plaintiff?
The State argues that:
[T]he critical question here pertains to the third element—whether Coutu's exercise of discretion exceeded the bounds of reasonableness, which it did. Consistent with the purpose of the Agreement, reasonableness required Coutu to work only for and at the direction of the BSR; to apprise the BSR of the full extent of his conduct; to assist the BSR (and certainly not its adversaries in PLT and HT-related litigation; and to conduct himself in a manner consistent with the BSR's directives and known positions, the applicable administrative orders, and New Hampshire law.(State's Post-Trial Mem. at 2-3.)
There was no dispute at trial that Coutu was the only individual involved among the BSR, PLT, HT or Department of Labor with any experience in insurance runoff and/or bankruptcy. The evidence is overwhelming that the BSR, through its employees, was well aware that Coutu was using his expertise to assist PLT and HT navigate the difficult requirements of operating their businesses pursuant to the Consent Decree. On September 16, 2014, Coutu was forwarded a draft Liaison Acknowledgment ("the Acknowledgment") indicating that "any business advice provided by the BSR liaison to PLT shall be the advice of the BSR liaison alone, and may not be attributed to the BSR." (Pl.'s Ex. 46.) The Acknowledgment was never executed by the BSR. However, Coutu credibly testified that Director Glennon told him he could provide advice to HT and PLT as long as it was clear the advice was advice from him personally, and not the position of the BSR. That Coutu relied upon the statements of Director Glennon and believed the Acknowledgement had either been signed or was unnecessary is evidenced by his communications with Attorney Patrick Closson in June 2015 seeking an executed copy of the Acknowledgement after, to his surprise, the BSR took the position that advice given to HT and PLT by him was improper. (Pl.'s Ex. 46.)
The State takes the position that the absence of an executed Acknowledgment is fatal because the Agreement provided that it can only be modified in writing. (Agreement ¶ 18.) However, by its terms, the Acknowledgment was not a modification of the Agreement, but merely clarified the parties' positions. There is nothing inconsistent with Coutu's obligations under the Agreement in his providing personal advice to PLT and HT about how to operate their business, particularly in light of the fact that he had a great deal of expertise in the area, and part of his duties under the agreement were to "attend and participate at committee and board level meetings of said risk pool" and "analyze business processes, methodologies and practices." (Agreement Ex. A.)
Moreover, and of critical importance is the fact that the evidence overwhelmingly demonstrates that the BSR, through Director Glennon and staff attorney Adrian LaRochelle ("LaRochelle"), was well aware that Coutu was providing business advice to PLT and HT. For example, on November 6, 2014, Coutu sent an email to Wendy Parker, executive director of PLT, in which he indicated that he had made substantive revisions to the strategic plan document and that while he was "stepping back from an active, if not leading role, in the process of helping chart a course which company should pursue," he "would be happy to answer specific technical questions, as well as provide my personal (not the BSR) view/thoughts of the final materials prior to November 18th board meeting." (Pl.'s Ex. 3.) Two days later, Coutu sent this email to Director Glennon and LaRochelle of the BSR. (Id.) An email of November 17, 2014, from Coutu to Director Glennon and LaRochelle advises that Coutu has been revising PLT's financials. (Pl.'s Ex. 4.) Given the lack of experience with insolvency of the PLT Board, and the detail in which it is addressed in PLT's strategic plan from December 4, 2014, it was obvious to the BSR that Coutu had substantially contributed to it. (Pl.'s Ex. 8.) The Commissioner of the Department of Labor testified that he attended meetings with both Coutu and Director Glennon and that he was comfortable that the BSR was aware of Coutu's assistance to the Department of Labor. (See also Pl.'s Ex. 39.) That the BSR was aware of Coutu was providing informal advice to HT and PLT is illustrated by its outside counsel's email to Coutu dated April 8, 2015, in which he discussed Coutu's proposed deposition by counsel for PLT and the ongoing administrative proceedings:
Third, Bruce said he wants your deposition. Nothing is scheduled. If we do allow your deposition, we'll figure out a mutually agreeable schedule. My thought is that you can't really be in the position of liaison offering informal advice and have Bruce gunning for you in a deposition. As a result, and expressly because Bruce made this request, I think you need to pull back to acting solely as my potential expert and suspend liaison activities as best you can.(Pl.'s Ex. 18 (emphasis added).) This email is not only relevant to show the BSR's knowledge of Coutu's activities; it is critical to establish (1) that neither Coutu nor the BSR thought that his activities were in any way inconsistent with the independent contractor agreement that he signed and (2) that the proposed "Acknowledgment" was nothing more than an acknowledgment of what the parties already understood, and not a modification of the Agreement.
Coutu communicated primarily with Director Glennon and staff counsel LaRochelle of the BSR. He rarely interfaced with the Secretary of State, William Gardner ("Gardner") who was the nominal head of the BSR and to whom Director Glennon reported. Coutu, acting in good faith, became convinced that the liability of PLT in runoff needed excess collateral; Gardner took the opposite view. Gardner believed that commingling capital within risk pools involving different lines was unlawful, and Coutu disagreed. Between March 15 and March 22, 2015, numerous meetings took place. At at a face-to-face meeting on March 27, 2017, Gardner and Coutu apparently had an angry exchange about Gardner's view that no collateral should be provided to PLT from the Department of Labor and Coutu's view that this position was unreasonable.
Gardner testified that as a consequence of this meeting he decided that Coutu quit on March 27, 2015, and that Coutu should no longer be paid. He directed Coutu not be paid without looking at Coutu's invoices "because he was done." Despite his belief that Coutu resigned on March 27, he directed that Coutu's invoice, which covered March 15 through March 27, 2015, not be paid. He never received a document confirming that Coutu had resigned and never heard him say those precise words.
Despite Gardner's claim that he ordered that Coutu not be paid after March 27 because he believed Coutu had resigned, Coutu produced an email sent from Kevin Bannon of the BSR to Director Glennon stating that Gardner came by his office [on May 8, 2015], and gave Bannon "the whole background as to why he wants [Coutu] out," which strongly suggests that Gardner understood that Coutu had not resigned. (Pl.'s Ex. 26). Similarly, Director Glennon testified that as late as April 2015, Gardner said of Coutu that "I don't want to meet with him or see him."
Apart from that, there is no dispute that Director Glennon continued to request services from Coutu in April and into May 2015. For example, on April 23, 2015, Coutu was giving advice to Director Glennon about hiring a health care actuary. (See Pl.'s Ex. 59.) Coutu was also asked to provide advice regarding PLT's capital and what was known as the PRIMEX issue, which involved a competitor of PLT and HT. On several occasions, Director Glennon assured Coutu that he was trying to get his invoices paid, but Coutu was never paid.
C
The State's position appears to be that because Coutu met with the Department of Labor to lobby regarding what Coutu thought was the best course for PLT to pursue, and because Coutu advocated for the release of funds to provide capital to PLT, the State does not have to pay Coutu for the consulting services he provided to the BSR. The State argues that Coutu "violated the Agreement by aligning with PLT against the BSR, thus further damaging the relationship between the two." (State's Post-Trial Mem. at 10.) The State cannot point to any harm caused by this conduct. But critically, the State does not explain how the fact that Coutu disagreed with the Secretary of State's decision about the best way to provide insurance coverage for municipalities reached Coutu's Agreement with the State. The lack of logic in the State's position is reflected by its conclusion:
In total, Coutu's unsatisfactory conduct and persistent breaches cut to the very core of the Agreement, and violate not only its express terms, but also its purpose and the general notions of fairness and honesty. For these reasons, Coutu is not entitled to the damages he seeks. The Court should require Coutu to reimburse the BSR for some or all of the monies previously paid.(State's Post-Trial Mem. at 11-12 (emphasis added).)
This argument is completely at odds with its principal argument that, even though Coutu may have complied with the terms of the Agreement, he violated the implied covenant of good faith and fair dealing. (Compare State's Post-Trial Mem. at 11-12, with State's Post-Trial Mem. at 2 ("Therefore, the critical question here pertains to the third element [of the doctrine of the implied covenant of good faith and fair dealing]—whether Coutu's exercise of discretion exceeded the bounds of reasonableness, which it did.").) The State cannot have it both ways.
The State's argument does not address the single overarching fact that Coutu, in the words of the Director Glennon of the BSR, "provided or exceeded" the services the State contracted for under the Agreement. The State has cited no authority for the proposition that where a party fully performs or exceeds his duties under a contract, he can be found to have failed to observe "reasonable limits in exercising discretion under that contract, consistent with the parties' purpose or purposes in contracting." Centronics Corp., 132 N.H. at 143. The State is responsible to pay Coutu the $23,146.26 that he earned.
D.
While the State raised a claim that Coutu violated the implied covenant of good faith and fair dealing by providing advice to HT and PLT, the Court found by a preponderance of the evidence that the State was, for the most part, aware of Coutu's activities, and most importantly, the State presented no evidence that this conduct violated the Agreement or that it would it was harmed in any way by his conduct. The Court finds for Coutu on the State's counterclaims, as it has introduced no evidence that Coutu breached the contract or the implied covenant of good faith and fair dealing.
III
Under the American rule, each party is generally responsible for his or her attorney's fees. Clipper Affiliates v. Checovich, 138 N.H. 271, 277 (1994). However, the New Hampshire Supreme Court has recognized a narrow exception to this rule "where an individual is forced to seek judicial assistance to secure a clearly defined and established right if bad faith can be established; where litigation is instituted or unnecessarily prolonged through a party's oppressive, vexatious, arbitrary, capricious or bad faith conduct; . . . and for those who are forced to litigate against an opponent whose position is patently unreasonable." Id. at 278 (citations and quotations omitted).
An ordinary breach of contract action provides no basis for award of attorney's fees, even if the breach is willful. There is no moral quality to a breach of contract. Frye v. Hubbell, 74 N.H. 358, 374 (1914). A party is entitled to breach a contract, and simply pay the damages incurred by the non-breaching party. Cox v. Jones, 73 N.H. 505, 505 (1906); Chellis v. Grimes, 72 N.H. 104, 106 (1903).Economists argue that what is termed an efficient breach of contract is an economic good and should be encouraged, because if the breaching party pays the damages due to the non-breaching party, the non-breaching party obtains the benefit of the bargain and the breaching party, who engages in a substitute transaction, obtains a greater benefit and also provides a benefit to a third party, the substitute counterparty. See, e.g. Thyssen v. SS. Fortune Star, 777 F.2d 57, 63 (2d Cir. 1985). But this theoretical construct is not applicable to the circumstances here.
There was no basis in law or fact to refuse to pay Coutu for work he performed, which (1) benefited the State, (2) was requested by the State pursuant to the Agreement, and most importantly, (3) satisfied or exceeded his duties under the Agreement. The State has provided no authority for the proposition that even though Coutu met or exceeded the requirements of his independent contractor contract, he somehow violated the implied covenant of good faith and fair dealing. The State has neither alleged nor proved any damage that it suffered as a result of Coutu's supposed improper conduct. But most importantly, and critical to the Court's determination is the fact that after having a decision not to pay Coutu under the contract, and thereby breaching it, the State continued to request services from Coutu, and got the benefit of those services. That conduct, coupled with the complexity and expense of this litigation, distinguishes this case from an ordinary breach of contract case.
Coutu's claim involved only some $23,000. Yet because of the State's counterclaim, involving the full contract price of $180,000, this case was transferred to the Business and Commercial Dispute Docket. Numerous depositions were taken, and the State has unsuccessfully moved for summary judgment. Coutu's resources could not match those of the State of New Hampshire and he was forced to expend substantial resources to recoup the $23,000 he was owed.
The New Hampshire Supreme Court has held that a party is entitled to attorney's fees where he is forced to seek judicial assistance to secure a clearly defined right if bad faith can be established. Funtown v. Town of Conway, 127 N.H. 312, 315 (1985); see also Harkeem v. Adams, 117 N.H. 687, 691 (1977). But the New Hampshire Supreme Court has also stated that bad faith is not limited to its narrow sense of intentional disregard of duty or intent to injure, but may be said to exist whenever an individual is forced to seek judicial assistance to secure a clearly defined and established right which should have been freely enjoyed without such intervention. Indian Head Nat'l Bank v. Corey, 129 N.H. 83, 87 (1986). An award of fees is appropriate where a contract claim is defended without any basis in fact. See LaMontagne Builders, Inc. v. Brooks, 154 N.H. 252, 255-56 (2006).
Here, the State had no evidence that Coutu failed to provide the services contracted for under the Agreement. In fact, testimony from the State's own witnesses established that Coutu satisfied or exceeded his obligations under the Agreement. Yet the State decided not to pay him, and continued to have him perform work and after he sued to recover the money he earned, the State brought a counterclaim to recover all of the money he had earned for work its own witnesses said satisfied or exceeded his contractual obligations. Coutu is entitled to attorney's fees.
Accordingly, within 30 days of the date of the Clerk's Notice of this Order, Coutu shall submit his fees and costs for approval. The State shall have 10 days to object.
SO ORDERED
11/8/17
DATE
s/Richard B . McNamara
Richard B. McNamara,
Presiding Justice RBM/