E-Alert Case Updates

Circuit Court Abused Discretion in Entering Default Based on Action of Defendant’s Insurance Carrier

Station Maintenance Solutions, Inc. v. Two Farms, Inc.
Case No.: 2039 (Maryland Court of Special Appeals, January 24, 2013)
by Eric M. Leppo, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In this recently issued opinion from the Maryland Court of Special Appeals, the Court reversed the Circuit Court for Baltimore County’s entry of Default against Station Maintenance Solutions, Inc. The Default was issued as a sanction when Station Maintenance’s Insurance Carrier failed to have a senior officer or employee attend a Court Ordered Settlement Conference.

This case arose in May 2010, when members of the Ratajczak family filed suit against Two Farms, Inc. (doing business as Royal Farms) alleging that approximately 5,400 gallons of gasoline had leaked from underground storage tanks and contaminated the Ratajczaks’ adjacent property (a single family home). Two Farms filed a Third-Party Complaint against Station Maintenance for failing to maintain and inspect the underground tanks.

In August 2011, Two Farms settled the matter with the Ratajczak family for $2.7 million, and in return the Ratajczaks’ assigned their claims against Station Maintenance to Two Farms. As such, the litigation moved forward between Two Farms and Station Maintenance. Station Maintenance had an insurance policy with Mid-Continent insurance. Pursuant to a joint request by the parties, the Court set a September 27, 2011 settlement conference in the matter. The Circuit Court’s September 6, 2011 Order indicated that both parties were required to attend, and that “A senior officer or employee of Station Maintenance’s insurance carrier [Mid-Continent] must be present, with binding settlement authority up to the full limits of its policy.”

The Court of Special Appeals noted that it was undisputed that both parties and a representative of Mid-Continent attended the settlement conference, but the representative for Mid-Continent was a third-party adjuster, not a “senior officer” with binding settlement authority. The Circuit Court for Baltimore County issued a judgment by default against Station Maintenance in the amount of $1,000,000 (the Mid-Continent policy limits). The settlement conference was not on the record and no written explanation was included on the Judgment Order.

Maintenance Solutions appealed the Judgment to the Court of Special Appeals, and argued that the circuit court lacked authority to impose a “case-ending sanction” against it for the actions of its insurer. It contended that case-ending sanctions are “generally reserved for conduct that is repeated, willful, and egregious, and which causes significant prejudice to other litigants or to the court.”

After discussion of the Circuit Court’s authority to enter sanctions for a Party’s failure to adhere to a scheduling order, including monetary sanctions, the Court of Special Appeals stated: “We now address the critical question in this case: whether the circuit court had authority to impose a sanction against appellant based solely on the conduct of its insurer, Mid-Continent.” Station Maintenance at *25. The Court noted that no Maryland case had previously addressed whether sanctions may be imposed on a party for its insurance company’s violation of a scheduling order.

The Court of Special Appeals then held that there is no authority to enter sanctions for an insurance company’s violation of the Scheduling Order, unless there is evidence that the party was involved or played a role in the insurance company’s violation. The Court held that there was no indication that Station Maintenance was involved or complicit in Mid-Continent’s violation of the court order; and as such, the Circuit Court did not have authority to sanction Station Maintenance. Id. at *26. The Circuit Court’s entry of default judgment was reversed and the matter was remanded.