A Maryland appeals court recently reversed a decision against a company hit with a million dollar judgment because of the actions of its insurer. The case began with a family finding that its home had been contaminated with gasoline leaking from an underground storage tank.
The Ratajczak family sued Royal Farms in the Circuit Court for Baltimore County in 2010, alleging that about 5,400 gallons of gasoline leaked from Royal Farms' underground storage tanks at its facility at 7950 Pulaski Highway in Baltimore and contaminated their single family home. The trial court issued a scheduling order, setting up a settlement conference in April 2011.
Royal Farms filed a third-party complaint against Station Management, requesting judgment by way of contribution and/or indemnification for all sums for which Royal Farms might be found liable plus attorneys' fees and costs, plus $1,000,000 for each count alleging Station Management's negligence and breach of contract in failing to maintain and inspect the underground tank that was the source of the alleged leak.
The Ratajczaks and Royal Farms, after a mediation conference, agreed to settle the family's claims against Royal Farms for $2.7 million dollars and the family agreed to assign their claims against Station Management to Royal Farms. Eventually, a settlement conference was scheduled between Royal Farms and Station Management. The parties were ordered to attend and to provide a senior employee with authority to enter into a binding settlement. Both parties and a representative of Mid-Continent attended the settlement conference. Mid-Continent's representative, however, was an independent third-party adjuster, not a senior officer or employee with authority to enter into a binding settlement. Station Maintenance said that a senior officer of Mid-Continent was not available and that they had requested a continuance but that Royal Farms' attorney would not agree to it. A default judgment for $1,000,000 was entered against Station Maintenance. Apparently, the judgment was entered as a sanction for the failure of Station Maintenance's insurer, Mid-Continent, to comply with the court's order requiring that a senior member of the company with authority to settle the case attend a settlement conference that had been scheduled by the trial court.
Station Maintenance Solutions, Inc. appealed the trial court's decision entry of a default judgment in favor of Two Farms, Inc. d/b/a Royal Farms as a sanction for an alleged violation of a scheduling order by Station Maintenance's insurer, Mid-Continent. Maryland's intermediate appellate court vacated the judgment and sent the case back to the trial court.
When a party or circuit court is confronted with an uncooperative party, the party or court may seek to compel the party's cooperation or punish the party, including civil or criminal contempt sanctions, according to a case decided in 2009. The circuit court has authority to sanction parties for violating scheduling orders, the court said. The cases that consider the question affirm that, the court said.
However, looking at the critical question in this case: Whether the circuit court had authority to impose a sanction against the appellant based solely on the conduct of its insurer, Mid-Continent. "We conclude that the circuit court lacks the authority to impose sanctions on a party for violation of a scheduling order based solely on the conduct of the parties' insurer," the court said.
"The authority to sanction is grounded in the belief that a party will comply with the order in order to avoid imposition of a penalty against it. If an insurance company - or, for that matter, any person or entity - was aware that someone else would be punished for its violation of a court's scheduling order, the threat of sanctions would create no incentive for it to comply with an order of the court," the court said.
Although no sanctioning power is enumerated in Maryland Rule 2-504, the purpose of the rule is to expedite and control the orderly flow of civil litigation in the trial court. Circuit courts retain authority under the rule to impose sanctions, including monetary sanctions, on parties that violate scheduling orders.
The court also explained that Royal Farms had acknowledged that there was no indication that Station Maintenance was involved in or played any role in Mid-Continent's violation of the scheduling order. "Where, as in this case, there is no information that a party was complicit in its insurer's violation of the court order, the circuit court has no authority to sanction the party," the court said.
As a result, the Court of Special Appeals reversed the trial court's decision.
The case is Station Maintenance Solutions, Inc. v. Two Farms, Inc.
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