Watson Truck & Supply Co., Inc. v. Males

801 P.2d 639, 111 N.M. 57

• Court: New Mexico Supreme Court
• Decided: November 27, 1990
• Docket: 18483
• Status: Published

Opinions

OPINION

RANSOM, Justice.

James Males appeals the trial court’s finding of a resulting trust in settlement proceeds from a previous lawsuit and the court’s consequent award of $85,724.80 plus interest in favor of Watson Truck & Supply Company and of Home Insurance Company. Finding a lack of substantial evidence to support a resulting trust or breach of a contractual duty of good faith owed by Males to Watson and Home, we reverse.

Males was injured in a natural gas explosion at the warehouse of Watson Truck & Supply Company. He sued Watson and the various contractors who built the Watson warehouse and installed its heating system. He also sued Hobbs Gas Company for its failure to “oderize” the natural gas supply. Watson was defended by its insurer, Home Insurance Company. Watson filed a cross-claim against Hobbs and the other defendants for property damage sustained in the explosion.

By the morning of trial, Males had settled his claims against all of the defendants other than Watson, Hobbs, and Craig Electric Company, the general contractor. After the jury was selected Craig offered to settle with Watson for a total of $375,000. Counsel for Males, Craig, and Watson and Home then held a settlement conference in which they entered into a “Mary Carter” agreement to settle the various claims between them.¹ Watson and Home agreed that Males would receive the entire $375,-000 offered by Craig and that both Watson and Males would release and discharge Craig. In addition, Watson and Home agreed to pay Males $125,000 on the condition that if Males received in excess of $500,000 as a result of a jury verdict against Hobbs, Males would pay Watson and Home the excess amount up to $125,-

000. The agreement thus guaranteed Males recovery of $500,000, even if the jury returned a verdict in favor of Hobbs, and allowed him to recover up to $1,000,000 before having to reimburse Watson and Home money from the $125,000 they had contributed to the settlement.

The jury returned a verdict in favor of Males for $839,312 in compensatory damages and found Hobbs forty-percent responsible for the explosion, a proportionate liability of $335,724.80. The jury also awarded Males $250,000 in punitive damages against Hobbs. Shortly after trial, one of Males’s attorneys wrote to Home’s counsel the following: “As per our settlement agreement, we will pay to Home the amount of $85,724.00 representing the amounts awarded to Mr. Males over the $500,000.00 when such funds are received.” This letter represents the only written reference to the settlement agreement at issue.

Subsequent to the trial, Hobbs paid Males its portion of the compensatory award ($335,724.80), but appealed the $250,000 award of punitive damages. While the appeal was pending, Males offered to settle the punitive damage award against Hobbs for $164,250.20 plus interest from the date of judgment. Hobbs accepted the offer and obtained a release and satisfaction from Males of his entire judgment. Excluding interest, Males received exactly $500,000 from Hobbs. Watson and Home were never requested to participate in the final settlement discussions. They were informed of the settlement between Males and Hobbs after the fact.

On February 2, 1988, Watson and Home petitioned the district court to enforce their settlement agreement with Males. Specifically, Watson and Home claimed a right to payment of $85,724.80 plus costs. The district court concluded: (1) the settlement agreement created a beneficial interest in Males’s judgment against Hobbs for amounts exceeding $500,000; (2) upon entry of Males’s judgment against Hobbs, a resulting trust was created in favor of Watson and Home as to amounts over $500,000; (3) Males settled and compromised the judgment with Hobbs in willful disregard of the rights and interest of Watson and Homes to that portion of the judgment in excess of $500,000; (4) Males owed Watson and Homes a duty of good faith to act with fairness and due diligence in dealing with their rights and interest in the judgment against Hobbs, and Males violated this duty when he settled with Hobbs without Watson and Home’s knowledge or consent. The district court entered judgment against Males in the amount of $85,-724.80 plus fifteen-percent interest from December 15, 1987, until paid.

Substantial evidence does not support finding of resulting trust. A resulting trust arises when a person makes a disposition of property under circumstances that raise an inference that he does not intend that the transferee have the beneficial interest in the property. Restatement (Second) of Trusts § 404 (1959). Since the person who holds the property is not entitled to the beneficial interest, the beneficial interest “springs back or results to the person who made the disposition or to his estate, and the person holding the property holds it upon a resulting trust for him or his estate.” Id. at 323. Unlike an express trust, the inference that the person who holds title to the property was not intended to also have the beneficial interest arises from the character of the transaction itself rather than from any declaration of intention by the party making the disposition of the property. Id. at 324.

Our decisions and the Restatement (Second) of Trusts recognize three general situations in which a resulting trust may arise:

(1) where an express trust fails in whole or in part;

(2) where an express trust is fully performed without exhausting the estate;

(3) where property is purchased and the purchase price is paid by one person and at his direction the vendor conveys the property to another.

Bassett v. Bassett, 110 N.M. 559, 566, 798 P.2d 160, 167 (1990); Restatement (Second) of Trusts §§ 411-429, 430-439, 440-460 (1959); see also McCord v. Ashbaugh, 67 N.M. 61, 352 P.2d 641 (1960) (where new owner of land reconveyed property to former owners without consideration to satisfy forest service requirements relative to transfer of grazing permit, former owner had only bare legal title and not beneficial interest); McDermott v. Sher, 59 N.M. 142, 280 P.2d 660 (1955) (drawing distinction between express and resulting trusts); Browne v. Sieg, 55 N.M. 447, 234 P.2d 1045 (1951) (evidence sufficient to show resulting trust where mother provided purchase money for real estate and son took title in his own name for mother’s convenience in dealing with the property).

It is apparent that none of these situations correspond to the facts of this case. It is equally apparent that Males never took title to, or recovered, any property in which Males was not entitled to the beneficial interest therein; this was the substance of the agreement between the parties — that Males was to have the first $500,000 of any recovery from Hobbs. Watson and Home, of course, claim a beneficial interest in the judgment rendered against Hobbs to the extent that it exceeded $500,000, to wit $85,724.80. Watson and Home assert that Males became a trustee for this amount for their benefit and owed them the duty of a trustee to act with good faith, reasonable diligence and skill. We cannot agree. It is undisputed that the parties never discussed Males’s right to compromise any judgment rendered against Hobbs. There were no discussions at the time the parties entered into the agreement concerning the rights of the various parties if an appeal were to be taken. Absent express or implied terms of agreement, it cannot reasonably be suggested that the parties somehow intended to create a beneficial interest in the excess amount of any judgment so as to guarantee recovery for Watson and Home.

Nor does the nature of the transaction itself raise any inference that Males intended Watson and Home to have a vested interest in the judgment. We have been cited to no authority showing that such a settlement agreement would create a resulting trust or impose the duties of a trustee in favor of one of the settling parties who may claim some contingent interest in the verdict nor has our own research disclosed such authority. We believe the agreement did not create a trust at all; rather it was a straightforward contractual arrangement providing for recoupment of funds, and the obligation to reimburse Watson and Home was subject to the condition precedent that Males receive more than $500,000 from Hobbs. The only written reference to the agreement suggests no more than this, that Males agreed to pay excess funds when received.

The parties in this case never had a meeting of minds on the question of Males’s right to settle. The matter remained outside the scope of their agreement. This Court will not rewrite a contract to create an agreement for the benefit of one of the parties that, in hindsight, would have been wiser. Cf. Smith v. Price’s Creameries, 98 N.M. 541, 650 P.2d 825 (1982). Substantial evidence does not support a conclusion that the parties agreed Watson and Home would obtain an interest in any uncollected judgment that would restrict Males’s right to settle the claim. We therefore conclude the trial court’s finding of a resulting trust also is unsupported by substantial evidence. It follows that Males had no duty of good faith as a trustee to include Watson and Home in his settlement negotiations with Hobbs and to obtain their consent to any compromise of the verdict against Hobbs.

Moreover, we believe that in compromising the verdict Males breached no general duty of good faith imposed in the performance of contractual agreements. Whether express or not, every contract imposes upon the parties a duty of good faith and fair dealing in its performance and enforcement. Spencer v. J.P. White Bldg., 92 N.M. 211, 585 P.2d 1092 (1978); Restatement (Second) of Contracts § 205 (1979). “Broadly stated, the covenant requires that neither party do anything which will deprive the other of the benefits of the agreement.” Romero v. Mervyn’s, 109 N.M. 249, 257, 784 P.2d 992, 1000 (1989) (quoting Seaman’s Direct Buying Serv., Inc. v. Standard Oil Co. of California, 36 Cal.3d 752, 768, 686 P.2d 1158, 1166, 206 Cal.Rptr. 354, 362 (1984)). Absent any honest pursuit of interests to which a party to a contract is entitled, i.e., absent cause or excuse, his or her intentional use of the contract to the detriment of another party is wrongful, constitutes bad faith, and clearly is a breach of the covenant of good faith and fair dealing. See Romero, 109 N.M. at 258, 784 P.2d at 1001 (contract entered into with “fingers crossed” simply to end an encounter, without intending to follow through on promise). Application of the covenant of good faith and fair dealing becomes difficult, however, under circumstances where, as here, it may be argued that from the covenant there is to be implied in fact a term or condition necessary to effect the purpose of a contract. In this case, because we have decided that the parties reached no agreement on whether Watson and Home would obtain an interest in any uncollected judgment that would restrict Males’s right to settle the claim, we cannot with consistence imply a term to effect such a purpose under the covenant of good faith and fair dealing.

Given the fact the parties reached no agreement on the circumstances wherein Males might compromise a right to actually receive in excess of $500,000, we believe that Males did not act inconsistently with the justifiable expectations of Watson and Home in reaching a settlement with Hobbs. Under their agreement Watson and Home may never have anticipated receiving any reimbursement of the $125,000 settlement unless Males were to receive in excess of $625,000 from Hobbs. We do not know.

Validity of Mary Carter agreements not adequately raised or briefed. Males also raises on appeal an issue of whether the settlement agreement between himself and Home, Watson, and Craig was void under Alder v. Garcia, 324 F.2d 483 (10th Cir.1963), since it was an assignment to a joint tortfeasor of a future recovery on behalf of an injured party. Because we find the agreement did not restrict Males’s right to compromise the verdict against Hobbs, and under the terms of the agreement Watson and Home were due no excess funds, we do not address this issue. As pointed out in the special concurrence of Justice Wilson, since Alder was decided, the adoption of comparative negligence has effected an abolition of the right of contribution between concurrent tortfeasors. The Alder decision was based upon public policy considerations expressed in the Uniform Contribution Among Tortfeasors Act, NMSA 1978, Sections 41-3-1 to -3-8 (Repl. Pamp.1989), which no longer has any force when joint and several liability is superseded by comparative fault. See Wilson v. Galt, 100 N.M. 227, 668 P.2d 1104 (Ct.App.), cert. quashed, 100 N.M. 192, 668 P.2d 308 (1983). Additionally, we believe the issue raised by Males is distinct from the issue of the validity of Mary Carter agreements generally. We are not prepared to rule on such an important public policy question without the latter issue having been raised, briefed, and argued by the parties.

For the foregoing reasons, the judgment of the district court is reversed.

IT IS SO ORDERED.

BACA, J., concurs. WILSON, J., specially concurring.

1 . "Mary Carter” agreements derive their name from the case of Booth v. Mary Carter Paint Co., 202 So.2d 8 (Fla.Ct.App.1967), overruled on other grounds, Ward v. Ochoa, 284 So.2d 385 (1973). Such agreements typically involve, as here, a settlement between a plaintiff and one or more defendants who guarantee the plaintiff a specified recovery. As here, the amount paid by a settling defendant depends on the amount later received by the plaintiff from the nonsettling defendants. As is also typically true, Watson was not released as a defendant from the lawsuit. It is this last feature of Mary Carter agreements in particular that has evoked their condemnation by some courts and forms the core objection of Justice Wilson in his special concurrence urging that they be declared void as against public policy.