STATE OF FLORIDA ex rel. the DEPARTMENT OF INSURANCE of the STATE OF FLORIDA, Receiver for United Southern Assurance Company, a Florida corporation authorized to transact an insurance business in Florida, appellee,
v.
COUNTRYWIDE TRUCK INSURANCE AGENCY, INC., a Florida corporation, appellee,
and Countrywide Insurance Agency, Inc., a Nebraska corporation, and David L. Fulkerson, appellants.
Supreme Court of Nebraska.
*433 Steven D. Davidson, of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim, Omaha, for appellants.
Mark E. Novotny and Kyle Wallor, of Lamson, Dugan & Murray, Omaha, for appellee.
HENDRY, C.J., WRIGHT, CONNOLLY, GERRARD, STEPHAN, McCORMACK, and MILLER-LERMAN, JJ.
STEPHAN, J.
This is an action brought by the State of Flоrida on the relation of the Department of Insurance of the State of Florida, the receiver of United Southern Assurance Company (USAC), an insolvent insurance company, against Countrywide Truck Insurance Agency, Inc. (Truck); Countrywide Insurance Agency, Inc. (Agency); and David L. Fulkerson. The petition alleges that Truck collected premiums for USAC but failed to remit them pursuant to the parties' agreement. Agency is alleged to be the "alter еgo" of Truck, and Fulkerson is alleged to be the operator, director, and controlling person of both Truck and Agency.
Florida filed a motion for default judgment against Truck upon Truck's failure to file a responsive pleading. Agency and Fulkerson, who were not in default, moved to stay the entry of default judgment against Truck until after trial. The district court for Douglas County, Nebraska, overruled the motion to stay, granted the motion for default judgment, and entered judgment against Truck in favor of Florida in the amount of $4,997,210. Upon consideration of the appeal of Agency and Fulkerson from this order, we conclude that the district court erred in denying the requested stay and entering the default judgment, and we therefore reverse, and remand for further proceedings consistent with this opinion.
FACTUAL AND PROCEDURAL BACKGROUND
In Florida's petition filed January 12, 1998, it alleged that its Department of Insurance served as the liquidator of USAC pursuant to the Florida Insurers Rehabilitation and Liquidation Act, Fla. Stat. Ann. § 631.001 et seq. (West 1996). It further alleged that Truck was a Florida corporation with its principal place of business in Omaha, Nebraska, and that Agency was a Nebraska corporation and the "alter ego" of Truck. Florida alleged that the operations of the two corporations were identical in that both utilized the same premises, equipment, and personnel, and that Agency was therefore "indistinguishable" from Truck. Florida further alleged that Fulkerson was a resident of Nebraska and at all times material was the officer and/or director and controlling person of both Truck and Agency.
Florida alleged that on or about January 1, 1989, USAC and Truck entered into a "General Agency Agreement," pursuant to which Truck functioned as an insurance agent on behalf of USAC in Nebraska and numerous other states and collected premiums for insurance products provided by USAC. During the months of May, June, July, and August 1997, Truck allegedly collected and reported collecting USAC premiums which, after deducting the 18.5 *434 percent commission to which Truck was entitled, amounted to $3,171,817. Florida further alleged on information and belief that "defendants" also collected additional premium deposits that totaled $2,325,401 and that "defendants" remitted only about $500,000, leaving a balance due and owing оf at least $4,997,218. Based upon these factual allegations, Florida sought relief against Truck, Agency, and Fulkerson on nine separately designated "causes of action": conversion of trust funds, statutory obligation to remit premium, enforcement of security interest, fraudulent conveyance, receivership fraudulent conveyance, conversion, breach of contract, breach of fiduciary duty, and accounting. Each "cаuse of action" refers to Truck, Agency, and Fulkerson collectively as "defendants."
Although Truck was served with summons, it failed to file a responsive pleading, and Florida moved for default judgment, requesting that the court enter judgment against Truck in the amount of $4,997,210; require Truck to provide an accounting of all premiums collected by it; and direct that Truck turn over its assets, including its books and records, to Florida. Agency and Fulkerson filed a motion to stay the entry of the default judgment against Truck, based upon the assertion that because Florida sought relief jointly against all named defendants, the entry of a default judgment against Truck would operate to their prejudice. On July 6, 1998, the district court granted Florida's motion for default judgment against Truck in the amount of $4,997,210, plus costs and interest, and directed Truck to turn over control of all assets, including its books and records, to Florida. The record reflects nо hearing or receipt of evidence on the issue of damages. In the same order, the court overruled the motion to stay entry of default judgment. Agency and Fulkerson perfected a timely appeal, which we removed to our docket pursuant to our statutory authority to regulate the caseloads of the appellate courts.
ASSIGNMENT OF ERROR
Agency and Fulkerson assign as error, restated, the entry of a default judgment against Truck for the relief demanded in the petition and the denial of their motion to stay entry of default judgment.
SCOPE OF REVIEW
We have held that in reviewing a trial court's action in vacating or refusing to vacate a default judgment, an appellate court will uphold and affirm the trial court's action in the absence of an abuse of discretion. First Nat. Bank of York v. Critel,
ANALYSIS
FROW DOCTRINE
The principal issue in this appeal is whether the district court erred in not applying what has become known as the "Frow doctrine," which arose from the opinion of the U.S. Supreme Court in Frow v. De La Vega,
The Supreme Court reversed the judgment against Frow, holding:
If the court in such a case as this can lawfully make a final decree against one defendant separately, on the merits, while the cause was proceeding undetermined against the others, then this absurdity might follow: there might be one decree of the court sustаining the charge of joint fraud committed by the defendants; and another decree disaffirming the said charge, and declaring it to be entirely unfounded, and dismissing the complainant's bill. And such an incongruity, it seems, did actually occur in this case. Such a state of things is unseemly and absurd, as well as unauthorized by law.
The true mode of proceeding where a bill makes a joint charge against several defendants, and one of them makes default, is simply to enter а default and a formal decree pro confesso against him, and proceed with the cause upon the answers of the other defendants. The defaulting defendant has merely lost his standing in court. He will not be entitled to service of notices in the cause, nor to appear in it in any way. He can adduce no evidence, he cannot be heard at the final hearing. But if the suit should be decided against the complainant on the merits, the bill will be dismissed as to all the defendants alikethe defaulter as well as the others. If it be decided in the complainant's favor, he will then be entitled to a final decree against all. But a final decree on the merits against the defaulting defendant alone, pending the continuance of the cause, would be incongruous and illegal.
The Court in Frow did not identify under what specific circumstances it is inappropriate to enter a default judgment against one of multiрle defendants. See Farzetta v. Turner & Newall, Ltd.,
According to one treatise, Frow establishes a general rule that "when one of several defendants who is alleged to be jointly liable defaults, judgment should not be entered against that defendant until the matter has been adjudicated with regard to all dеfendants, or all defendants have defaulted." 10A Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure: Civil § 2690 at 73 (3d ed.1998). Wright further states that the Frow doctrine also applies where liability is joint and several and even "probably can be extended to situations in which several defendants have closely related defenses." Id. at 76. Several courts have applied Frow in accordance with this approach. See, Farzetta v. Turner & Newall, Ltd., supra (holding that Frow stands for proposition that if facts are proved at trial which exonerate answering defendants and thаt as matter of logic preclude liability of defaulting defendant, plaintiff cannot obtain judgment against defaulting defendant, even though defaulter failed to participate in proceeding in which exculpatory facts were proved); Gulf Coast Fans v. Midwest Elec. Importers,
Other authorities interpret Frow v. De La Vega,
Frow stands for the narrow rule that a default judgment may not be entered against one of several defendants when:
"thе theory of recovery is one of true joint liability, such that, as a matter of law, no one defendant may be liable unless all defendants are liable, or; the nature of the relief demanded is such that, in order to be effective, it must be granted against each and every defendant."
10 James W. Moore, Moore's Federal Practice § 55.25 at 55-45 and 55-46 (3d ed.1999). Under this approach,
Frow ... does not apply to cases involving the joint and several liаbility of multiple defendants for damages, because in such a case the liability of each defendant is not necessarily dependent upon the liability of any other defendant, and plaintiff may be made whole by a full recovery from any defendant.
Id. at 55-46.
Some courts have followed the narrow interpretation of Frow articulated by Moore. See, McMillian/McMillian, Inc. v. Monticello Ins. Co.,
Frow involved a claim of a joint tort to defraud the plaintiff of title to a res. To the extent that it holds that there cannot be inconsistent adjudications as to joint liability or as to a single res in controversy this ancient equity case remains good law. But to apply Frow to a claim of joint and several liability is to apply that venerable case to a context for which it was never intended, and ignores the several or independent aspects of the claim set forth in this complaint. The result in Frow was clearly mandated by the Court's desire to avoid logically inconsistent adjudications as to liability. However, when different results as to different parties are not logically inconsistent or contradictory, the rationale for the Frow rule is lacking.
The appellate courts of Nebraska have never specifically recognized or applied the Frow doctrine. However, two reported cases address circumstances in which a default judgment was entered against one of several defendants. In Grant v. Clarke, *437
In German-American Bank of Milwaukee v. Stickle,
The business of the jury was to try issues of fact, and, as between the plaintiff and the defaulted defendants, there was no issue of fact to try. The claim of the bank against [the defaulters] was confessed, and judgment should have been rendered accordingly. The court therefore erred in dismissing the actiоn.
Id. at 325-26,
APPLICABILITY OF FROW IN THIS CASE
Florida characterized the relationship of Agency and Truck as follows:
Agency is the alter ego of Truck, its operations being identical to Truck's, consisting of:
A. the same persons;
B. engaged in the same business activities;
C. utilizing the same assets and personnel; and
D. operating from the same premises with the same telephone numbers, the same network of insurance producers, the same computer system, and is otherwise indistinguishable from Truck.
In addition, it alleged that Fulkerson "functioned as an officer and/or director, as well as а controlling person" of both corporations.
A similar relationship between defendants was alleged in Nichiro Gyogyo Kaisha v. Norman,
Additionally, as one of its theories of recovery in the instant petition, Florida alleged a fraudulent transfer of assets from Truck to Agency. In this regard, it asserted that the three named defendants "undertook a course of action betweеn and among themselves to strip substantially all value from Truck and transfer it to Agency, both of which companies were controlled by defendant Fulkerson." Similar allegations were considered in In re Vantage Petroleum Corp.,
where several defendants are charged with transferring funds to one of the defendants, all of the defendants might be found liable, or fewer than all of the defendants might be found liable; but never would only a transferor or only a transferee be found liable. Such a situation, however, becomes a possibility upon the entry of a default judgment solely against [the transferee]. Although all of the alleged transferors might be exonerated, the transferee would nevertheless be held liable. A finding of liability as to the transferee but no liability as to all transferors would certainly be inconsistent and unjust.
Id. at 260.
As we interpret Frow v. De La Vega,
Because the default judgment against Truck and a judgment on the merits in favor оf Agency and Fulkerson would be logically inconsistent and prejudicial to the interests of Agency and Fulkerson, we conclude that the Frow doctrine is applicable in this case involving, inter alia, allegations of joint liability, and that Agency and Fulkerson have sufficient stakes in the outcome of the controversy to afford them standing to appeal from the default judgment against Truck. See, Hussey, Gay & Bell v. Georgia Ports Authority,
Also pertinent to our review is the longstanding principle of Nebraska law that the amount of damages alleged is not proved by default. Neb.Rev.Stat. § 25-842 (Reissue 1995) provides, "Every material allegation of the petition not controverted by the answer ... shall, for the purposes of the action, be taken as true.... Allegations of value or of amount of damage shall not be considered as true by failure to controvert them." Applying this stаtutory language, we have held that where a defendant is in default, the allegations of the petition are to be taken as true against him, except allegations of value and amount of damage. See, Gatchell v. Henderson,
For these reasons, we conclude that the district court abused its discretion in denying the motion to stay entry of a default judgment against Truck pending resolution of the claims against Agency and Fulkerson and in entering the default judgment against Truck. The district court should have entered an order finding Truck to be in dеfault and, therefore, ineligible to assert defenses or participate in trial, but should have deferred any entry of judgment until after the claims against Agency and Fulkerson were adjudicated.
We note that the judgment in this case was entered 9 days prior to the effective date of Neb.Rev.Stat. § 25-705(6) (Cum. Supp.1998), which provides that in a civil case involving multiple parties,
the court may direct the entry of a final judgment as to one or more but fewer than all of the claims or parties only upon an express determination that there is no just reason for delay and upon an express direction for the entry of judgment. In the absence of such determination and direction, any order or other form of decision, however designated, which adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties shall not terminate the action as to any of the claims or parties, and the order or other form of decision is subject to revision at any time before the entry of judgment adjudicating all the claims and the rights and liabilities of all the parties.
We express no opinion regarding the applicability of the Frow doctrine after the effective date of this statute.
CONCLUSION
For the reasons stated, we conclude that the district court abused its discretion in entering a default judgment in the amount of $4,997,210 against Truck. The judgment is therefore reversed and vacated, and the cause is remanded for further proceedings consistent with this opinion.
REVERSED AND VACATED, AND CAUSE REMANDED FOR FURTHER PROCEEDINGS.