No

No. 98-305

IN THE SUPREME COURT OF THE STATE OF MONTANA

1999 MT 252

296 Mont. 267

989 P.2d 309

 NANCY LANE,

Plaintiff and Appellant

v.

FARMERS UNION INSURANCE,

Defendant, Third Party Plaintiff 

and Respondent 

APPEAL FROM: District Court of the Thirteenth Judicial District,

In and for the County of Yellowstone,

The Honorable Maurice R. Colberg, Jr., Judge presiding.

COUNSEL OF RECORD:

For Appellant:

Kenneth D. Peterson, Peterson and Schofield, Billings, Montana

For Respondent:

James R. Halverson, Herndon, Sweeney & Halverson, Billings, Montana

Submitted on Briefs: March 11, 1999

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Decided: October 21, 1999

Filed:

__________________________________________

Clerk

Justice James C. Nelson delivered the Opinion of the Court.

¶1.Plaintiff and Appellant Nancy Lane (Lane) appeals from summary judgment 

granted by the Thirteenth Judicial District Court, Yellowstone County. In her 

complaint, Lane alleged that the Defendant and Respondent, Farmers Union 

Insurance (Farmers), improperly denied coverage following a fire that severely 

damaged Lane’s home, under a policy that named both her, and her husband Brad, 

as insureds. The District Court found that the intentional acts of Brad Lane, as 

decreed by a prior default judgment, precluded Lane’s recovery under the express 

terms of her policy with Farmers. Lane’s motions to set aside the judgment, pursuant 

to Rules 59(g) and 60(b), M.R.Civ.P., were deemed denied by the District Court. We 

reverse and remand.

¶2.Of the two issues raised by Lane, we find the following dispositive:

Did the District Court err in granting summary judgment to Farmers based on the 

conclusion that a default judgment, which decreed Brad Lane had committed certain 

acts, could as a matter of law bar Nancy Lane’s loss claim under her policy with 

Farmers?

Background Facts

¶3.On February 17, 1995, a house owned by Lane on Box Elder Creek Road in 

Billings, Montana, was severely damaged by a fire. After the fire, Lane and her 

husband, Brad, signed and submitted a claim for losses under their insurance policy 

with Farmers. Both were named insureds. The policy had become effective January 

4, 1995, and had been canceled January 20, 1995, for the stated reason that "this risk 

no longer meets our underwriting requirements." The cancellation would have taken 

effect February 22, 1995.

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¶4.Farmers denied the claim, based on "gathered evidence," which allegedly 

demonstrated Brad intentionally set fire to the Lanes’ house "with apparent 

knowledge by Nancy," and that Brad had also failed to disclose requested 

information regarding past insurance claims on the Lanes’ policy application. 

Farmers claimed that either act barred recovery by an insured pursuant to express 

policy exclusions and conditions. 

¶5.In support of these contentions, Farmers has asserted that Brad Lane "was 

investigated and prosecuted" for intentionally setting the fire, which it claims was 

"declared an arson." Farmers has further contended that the Lanes’ policy 

application, bearing Brad’s signature, demonstrated he concealed or provided false 

information. The focal point of this contention was Brad’s response to the request 

"please list all losses during the past 5 years," to which he responded "none." This 

request, under "Prior Insurance Information," followed a request for the name of 

the Lanes’ prior home owners insurance carrier. Brad provided the name of Trinity 

Universal of Kansas. Lane, in her deposition, admitted that she had filed a claim on 

her vehicle insurance approximately three years prior to the fire at the Box Elder 

Creek Road home. Farmers does not argue, nor does the record indicate, that the 

Lanes made any claims under their policy with Trinity.

¶6.Lane has never disputed that Brad was charged and prosecuted for arson. Rather, 

she has asserted throughout this litigation that Brad was never convicted. This 

assertion is not contradicted by any evidence found within the record. To the 

contrary, although Farmers has offered numerous conclusory allegations in its brief 

regarding the conduct of Lane and her husband dating back to the 1970s, it has not 

provided any further documentation to substantiate its claims beyond Lane’s sworn 

deposition and the Lanes’ policy application and agreement.

¶7.Also noteworthy is the uncontested assertion by Lane that she and Brad, although 

not legally separated, have not occupied the same home for much of their twenty-twoyear marriage. In light of this, Lane states she was living and working in Glendive, 

located in Dawson County, at the time of the fire. Brad, on the other hand, was living 

in the Billings house at the time. 

¶8.On February 14, 1997, Lane, proceeding pro se, brought suit against Farmers, 

seeking a declaratory judgment that Farmers had violated the terms of the insurance 

policy, and, in bad faith, had denied her claim. She asserted that she had complied 

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with all terms and conditions of the policy and that Farmers "knew" she was not 

responsible for the fire. Furthermore, she contended that $180,000 of the $220,000 

claim for damaged or destroyed property belonged to her.

¶9.In response, Farmers filed an answer, a counterclaim, and a third-party 

complaint against Brad Lane. The third-party complaint alleged that Brad 

intentionally set the fire and committed "fraud, concealment, misrepresentation, 

[and] false swearing," when he failed to disclose requested information on the policy 

application. For this reason, Farmers averred in its counterclaim that Nancy, 

pursuant to express policy conditions and exclusions, was barred from recovery 

under the policy as well.

¶10.On July 28, 1997, Farmers initiated an entry of default against Brad Lane for his 

failure to answer or otherwise appear in response to the third-party complaint, 

which had been served July 7, 1997, after numerous failed attempts. (Meanwhile, 

Lane had timely answered Farmers’ counterclaim against her, which had been 

served at her residence in Glendive on April 15, 1997.) A default judgment order was 

issued by the District Court on August 1, 1997. The order, prepared by counsel for 

Farmers and signed by the District Court, decreed that there was no coverage for the 

claims of Brad Lane "because of his fraud, concealment, misrepresentation, false 

swearing, and intentional setting of fire," and therefore Farmers had "no duty to pay 

any of the claims of Bradley Lane arising from the house fire." 

¶11.On October 29, 1997, Farmers moved for summary judgment. In support of its 

motion, Farmers contended that the deemed admissions decreed in the default 

judgment order resolved all material facts regarding the rejected claim under the 

terms of the policy. 

¶12.Lane did not file a brief or appear at the January 30, 1998 summary judgment 

hearing. At the time, she was in the process of securing representation. It is unclear 

from the record to what extent the move from pro se to hiring legal counsel had on 

her failure to file a brief or appear. Nevertheless, summary judgment for Farmers 

was granted, and an order, again prepared by counsel for Farmers, was signed the 

day of the hearing. The District Court’s memorandum declared that it was 

"undisputed that . . . Brad Lane intentionally caused the fire . . ." Therefore, the 

order found that there was "no coverage under the Farmers policy for Nancy Lane’s 

claims or losses arising from the February 17, 1995 fire . . ."

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¶13.Subsequently, counsel for Lane moved the District Court, pursuant to Rules 59

(g) and 60(b), to amend the judgment, arguing that Lane had difficulty obtaining 

representation, and could not effectively respond to Farmers’ summary judgment. 

This motion was deemed denied as of April 8, 1998. Lane appealed both the granting 

of summary judgment in favor of Farmers and the denial of her post-judgment 

motions. 

Standard of Review

¶14.This Court reviews an order granting summary judgment under Rule 56, M.R.

Civ.P. by utilizing the same criteria as the district court. See Bruner v. Yellowstone 

County (1995), 272 Mont. 261, 264, 900 P.2d 901, 903. Summary judgment is a 

remedy which should be granted when there is no genuine issue as to any material 

fact and the moving party is entitled to judgment as a matter of law. See Rule 56(c), 

M.R.Civ.P. The procedure should never be substituted for trial if a material factual 

controversy exists. See Payne Realty v. First Sec. Bank (1992), 256 Mont. 19, 24, 844 

P.2d 90, 93.

¶15.When we review a district court's conclusions of law, our standard of review is 

plenary and we must determine whether the court's conclusions are correct as a 

matter of law. See Hicklin v. CSC Logic, Inc. (1997), 283 Mont. 298, 301, 940 P.2d 

447, 449.

¶16.Under our de novo review, if we find any material facts remain in dispute 

regarding the relevant acts committed by Brad Lane, then summary judgment was 

improper. Further, if the District Court found that Farmers was entitled to judgment 

as a matter of law, and the legal basis for this conclusion was incorrect, summary 

judgment was likewise improper.

Discussion

Did the District Court err in granting summary judgment to Farmers based on the 

conclusion that a default judgment, which decreed Brad Lane had committed certain 

acts, could as a matter of law bar Nancy Lane’s loss claim under her policy with 

Farmers?

¶17.Farmers asserts that Brad Lane intentionally set fire to the Lane home covered 

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by the Lanes’ policy with Farmers. This assertion is sustained, Farmers argues, by 

the District Court’s default judgment order, which decreed Brad Lane committed 

the act, as well as the alleged acts of fraud, concealment, misrepresentation, and false 

swearing. Consequently, Farmers maintains, the default judgment was a proper 

basis for summary judgment in that it conclusively resolved any dispute over 

whether Brad Lane committed the alleged acts.

¶18.The District Court agreed in granting Farmers’ motion for summary judgment 

against Nancy Lane. The District Court determined that the default judgment order 

of August 1, 1997, undisputedly "established that Brad Lane intentionally set the 

February 17, 1995 fire at the Lanes’ home at 1015 Box Elder Creek Road." The 

District Court reasoned that under this Court’s decision in Woodhouse v. Farmers 

Union Mutual Ins. Co. (1990), 241 Mont. 69, 785 P.2d 192, a policy provision is 

determinative where it "clearly and unequivocally states that a loss caused by an 

intentional act of an insured party bars coverage." Woodhouse, 241 Mont. at 72, 785 

P.2d at 194. The relevant portions of Farmers’ policy state:

1. We do not insure for loss caused directly or indirectly by any of the following. 

Such loss is excluded regardless of any other cause or event contributing 

concurrently or in any sequence to the loss. 

. . .

h. Intentional Loss, meaning any loss arising out of any act committed:

(1) by or at the direction of an insured; and 

(2) with the intent to cause a loss. 

. . . 

2. Concealment or fraud. The entire policy will be void if, whether before or after 

a loss, an insured has: 

a. intentionally concealed or misrepresented any material fact circumstance; or 

b. engaged in fraudulent conduct; or 

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c. made false statements relating to this insurance.

The District Court determined, as a matter of law, that there was no coverage under 

the policy for Nancy Lane’s claims or losses arising from the Box Elder Creek Road 

fire. 

¶19.Our analysis of this issue involves two distinct but intertwined strands. The first 

involves a determination of precisely what may be "deemed admitted" when a 

default judgment is entered against a party for failure to answer or otherwise 

appear. The second is whether the doctrine of collateral estoppel precludes Lane 

from re-litigating the issue of Brad Lane’s alleged acts which were decreed by the 

default judgment. We will address each sub-issue in order. 

1. Admissions by Default

¶20.Lane argues that any deemed admission by her husband, Brad, pursuant to the 

default judgment entered against him, are not binding on her. Our review of this 

issue is accordingly narrowed to whether in this instance the allegations relevant to 

summary judgment in Farmers’ third-party complaint were deemed admitted as a 

matter of law by Brad Lane.

¶21.As a general rule, under Rule 55, M.R.Civ.P., a default judgment based on one 

party’s failure to answer under Rule 8, M.R.Civ.P., permits the non-defaulting party 

to assert that all factual allegations in the pleadings are deemed admitted in 

ascertaining liability. See Wheat v. Safeway Stores, Inc. (1965), 146 Mont. 105, 110, 

404 P.2d 317, 319 (quoting from 2 Moore’s Federal Practice, that "all averments of 

the complaint, other than those as to the amount of damage, will stand admitted 

unless the defendant answers . . ."). This general rule, in turn, is an exception to an 

overriding principle that cases are to be tried on the merits and judgments by default 

are not favored. See Maulding v. Hardman (1993), 257 Mont. 18, 23, 847 P.2d 292, 

296. 

¶22.Accordingly, Farmers argues that its assertions--that Brad Lane intentionally set 

fire to the Lane home, and committed fraud, concealment, misrepresentation and 

false swearing--have been procedurally transformed from pled allegations into 

legally proven facts pursuant to a valid default judgment. Consequently, the default 

judgment order serves as a proper basis for resolving all issues of material fact under 

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the summary judgment standard of review. Indeed, pursuant to this Court’s holding 

in Woodhouse, if it can be shown that as a matter of law Brad Lane, as a named 

insured, intentionally set the fire, or provided false or misleading information on the 

policy application, then Farmers should rightfully be able to deny Nancy Lane’s 

claim. See Woodhouse, 241 Mont. at 72, 785 P.2d at 194.

¶23.Although we have not squarely addressed an identical set of procedural 

circumstances, we have in the past formulated guiding principles sufficient to 

address this issue. We have held that the deemed admissions resulting from one 

party’s failure to respond to an amended counterclaim, due to a technicality, could 

not sustain a claim for fraud in a subsequent motion for summary judgment. See 

Aldrich & Co. v. Donovan (1989), 238 Mont. 431, 778 P.2d 397. 

¶24.Aldrich involved a dispute between a contractor, Donovan, and a building 

supplies retailer, Aldrich. Similar to Lane here, Aldrich initiated the action. 

Donovan, similar to Farmers, filed an answer which included a counterclaim alleging 

fraud. On appeal, Donovan argued that "the allegations in his counterclaims [should 

be] deemed admitted, thereby proving his case [for the purpose of summary 

judgment]." Aldrich, 238 Mont. at 436, 778 P.2d at 400. We affirmed the District 

Court’s granting summary judgment for Aldrich, and agreed that Donovan’s claim 

was:

[I]nsufficient, because the "facts" alleged by Donovan . . . were mere conclusory 

statements rather than evidence. The [district] court held that Donovan had 

presented virtually no evidence to support his claim, which therefore failed as a 

matter of law.

On appeal Donovan again relies on allegations supposedly deemed admitted by the 

procedural rules . . . to prove his case. We have held that these allegations were not 

deemed admitted, so this argument fails. 

Aldrich, 238 Mont. at 436, 778 P.2d at 400. See also Maulding v. Hardman (1993), 257 

Mont. 18, 26-27, 847 P.2d 292, 298 (holding that allegations in the plaintiff’s complaint 

based upon "information and belief," which were deemed admitted following the 

defendant’s failure to answer, were "unsubstantiated," and could not support an award of 

punitive damages). 

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¶25.Additionally, in construing Rule 8, M.R.Civ.P., in conjunction with default 

judgments pursuant to Rule 55, M.R.Civ.P., we have often turned to Moore’s Federal 

Practice for guidance. See, e.g., McClurg v. Flathead County Comm’rs (1978), 179 

Mont. 518, 519-20, 587 P.2d 415, 416 (holding that a Rule 8 default is not appealable 

until a final judgment is entered, and citing 6 Moore’s Federal Practice § 55.10 (2d 

ed. 1966) as authority). Accordingly, we adopt the general rule here that although 

"[a]t the time of entry of default, the facts alleged by the plaintiff in the complaint 

are deemed admitted . . . . plaintiff’s conclusions of law are not deemed established." 

10 Moore’s Federal Practice § 55.12(1) (3d ed. 1999). See also 10A Charles Alan 

Wright et al., Federal Practice and Procedure, Civil 3d § 2688 at 63 (1998) (stating "a 

party in default does not admit mere conclusions of law").

¶26.A review of case law following Moore’s rule on this issue reveals that the 

argument that legal conclusions may be deemed admitted pursuant to a default 

judgment runs contrary not only to the foregoing principles espoused by this Court, 

but to the spirit and intent of the Rules of Civil Procedure employed by the courts in 

this country dating back to at least 1885. See Nishimatsu Constr. Co., Ltd. v. Houston 

Nat’l Bank (5th Cir. 1975), 515 F.2d 1200, 1206 (referring to Thomson v. Wooster

(1885) 114 U.S. 104, 5 S.Ct. 788, 29 L.Ed. 105, as the "venerable but still definitive 

case" and relying on the same for the proposition that a party against whom a 

default judgment is entered is not held to admit facts that are not well-pleaded or to 

admit conclusions of law). See also Skanchy v. Calcados Ortope Sa (Utah 1998) 952 

P.2d 1071, 1076 (stating that a default judgment is valid only if the well-pleaded facts 

show that the plaintiff is entitled to judgment as a matter of law); Moran v. Moran

(Ariz. App. 1996), 933 P.2d 1207, 1214 (concluding that a defaulting defendant is not 

held to have admitted conclusions of law); Danning v. Lavine (9th Cir. 1978), 572 

F.2d 1386, 1388 (following Nishimatsu and citing Thomson); Trans World Airlines, 

Inc. v. Hughes (D.C.N.Y. 1969), 308 F.Supp. 679, 683 rev’d on other grounds (stating 

rule derived from Thomson that allegations which are not well-pleaded include 

"allegations . . . which are not susceptible of proof by legitimate evidence"). 

¶27.Based on the foregoing, we hold that the determination of whether a person has 

committed any one of the acts of arson, fraud, concealment, misrepresentation or false 

swearing--each subject to criminal or civil liability--is a conclusion of law that can 

only be reached after applying particular rules of law to specific findings of fact. 

These acts cannot, as a matter of law, be "deemed admitted" pursuant to an 

otherwise valid default judgment, merely because a party failed to answer or 

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otherwise appear. 

¶28.Having reached this holding, we now turn to the record, pursuant to our de novo

review, to determine whether any legal conclusions were "deemed admitted," and if 

so, whether they were supported by any legitimate evidence. 

¶29.While it is uncontested that police investigated Brad Lane following the 

February 17, 1995 fire, the allegation that he intentionally set the fire is not only 

fervently contested by Lane, but Farmers has not provided any evidence to 

substantiate this claim. 

¶30.Normally, the intent to commit an act is a question of fact. See, e.g., State v. 

Kester (1986), 220 Mont. 41, 45, 713 P.2d 537, 540 (stating that intent may be inferred 

from substantial evidence of defendant's acts). Thus, the District Court might have 

concluded that the evidence of Brad Lane’s activities prior to the fire created the 

inference that he intentionally set the fire, satisfying Farmers’ no-intentional-act 

policy provision. In other words, if the uncontested substantial evidence showed that 

Brad Lane set the fire, then factual allegations of his state of mind may not 

necessarily be legal conclusions, and, subsequently, could be held as deemed admitted 

by a default judgment. Here, however, the default and summary judgments were not 

based on any evidence that Brad committed the act of setting the fire, let alone raise 

an inference as to his state of mind. 

¶31.Furthermore, although Farmers did not allege in its complaint or in its summary 

judgment brief that Brad Lane committed the criminal act of arson, which would 

have been on its face a legal conclusion, Farmers has nevertheless claimed in its brief 

to this Court that the "fire was declared an arson,"and "an arson fire [was] caused 

by [Lane’s] husband," and the fire was "a classic arson fire." In either respect, 

whether Brad Lane committed arson, as defined under § 45-6-103, MCA, or 

"intentionally" set the fire, we conclude that the record in its entirety simply does not 

provide sufficient, legitimate evidence to support either allegation, both of which, in 

the absence of any factual underpinning, are nothing more than conclusions of law. 

We therefore hold it was incorrect to find that as a matter of law Brad Lane 

admitted to setting fire to the Lanes’ home based solely on the legal conclusions 

alleged in Farmers’ pleadings and subsequently decreed in the default judgment 

order. 

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¶32.We reach the same conclusion in our analysis of the allegations stemming from 

Brad Lane’s response to requested information on Farmers’ policy application. The 

exhibits within the record, offered by Farmers, show that Trinity Universal of 

Kansas, which had previously insured Lane’s home, canceled its policy due to an 

adverse credit report. The exhibits further show that Farmers was aware of this fact 

in accepting the Lanes' application because Brad Lane provided this information. 

When requested to name the Lanes’ prior home insurance carrier, Brad provided 

the name Trinity Universal of Kansas. Under the following request--loss history for 

the past five years--he listed "none." Elsewhere on the application, Brad was 

similarly requested to provide information pertaining to loss due to "fire, theft or 

vandalism . . . within the past 5 years." Again, he responded by circling "no." It is 

not clear whether these requests pertained to the prior carrier, Trinity, or to all 

insurance carriers--home, auto, etc.--on which both he and Nancy Lane may have 

made claims. 

¶33.Even taking all of Farmers’ allegations of the Lanes’ past insurance claims as 

true--however irrelevant such allegations may be to this particular fire loss claim--

the record offers no indication that Brad Lane’s responses in this instance were not 

truthful, or intentionally withheld information, or, for that matter, that other 

carriers had ever denied coverage or canceled a policy due to misrepresentations of 

any kind. Surely, Farmers need not be reminded of the "reasonable consumer" 

standard for construing insurance documents. See Stutzman v. Safeco Ins. Co. of 

America (1997), 284 Mont. 372, 379-80, 945 P.2d 32, 36 (concluding that the "average 

consumer" of insurance would interpret the term "relative" to include his or her 

spouse). Or, that ambiguities in the language of the contracts will be construed 

against the insurer. See Wendell v. State Farm Mut. Auto. Ins. Co. (1999), 1999 MT 

17, ¶ 14, 293 Mont. 140, ¶ 14, 974 P.2d 623, ¶ 14. See also Nishimatsu Constr. Co. v. 

Houston Nat'l Bank (5th Cir. 1975), 515 F.2d 1200, 1206-07 (stating that where there 

is a disparity between a written instrument annexed to a pleading and an allegation 

in the pleading based thereon, the written instrument will control). Accordingly, we 

hold that in this instance the allegations of "fraud, concealment, misrepresentation 

and false swearing" are conclusory statements of law unsupported by any legitimate 

evidence in the record, and therefore were not deemed admitted by Brad Lane 

pursuant to the default judgment. 

¶34.In sum, we hold that under the foregoing analysis, the relevant averments in 

Farmers third-party complaint were conclusions of law that cannot, as a matter of 

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law, be held against Brad Lane, or any other party, as an admission of any of the 

alleged acts relevant to Farmers’ motion for summary judgment. We conclude that 

the District Court relied exclusively on these averments in issuing its default decree, 

and then in finding no genuine issues of material fact remained in dispute. We hold, 

therefore, that summary judgment was improper in that material facts remain in 

dispute, and judgment in favor of Farmers was incorrect as a matter of law. 

2. Collateral Estoppel

¶35.On appeal, Lane argues that the default judgment against Brad has no collateral 

estoppel effect in her claim against Farmers. In other words, Lane argues that she 

cannot be precluded, as a matter of law, from litigating the issue of whether Brad 

committed the alleged acts as decreed by the default judgment. In response, Farmers 

cites the collateral estoppel rule found in Aetna Life and Casualty Ins. Co. v. Johnson

(1984), 207 Mont. 409, 413, 673 P.2d 1277, 1279, in arguing that Lane cannot be 

"allowed to escape the effects of valid judgments," yet the doctrine "does not apply 

to this case," because the default judgment was not a "prior adjudication." 

¶36.We conclude that the arguments set forth by both parties on this issue are 

persuasive. As a matter of law, we hold that the doctrine of collateral estoppel does 

not apply in this case, following the general rule that a default judgment generally 

carries no collateral estoppel effect. See 10 Moore’s Federal Practice § 55.50(2)(a) (3d 

ed. 1999) (stating that "under most circumstances, courts have held that a default 

judgment has no collateral estoppel effect"); Restatement (Second) of Judgments § 

27 cmt. e (1982) (stating that "none of the issues is actually litigated" in the cases 

where judgment is entered by "confession, consent, or default"). 

¶37.In reaching this holding we note that collateral estoppel, an affirmative defense, 

must be set forth affirmatively in a party’s responsive pleading pursuant to Rule 8(c), 

M.R.Civ.P. Accordingly, the defense was neither available to Farmers, which did not 

plead it in its answer, nor factored into the District Court’s summary judgment 

order. We address the estoppel doctrine here, on appeal, because it was addressed by 

both parties pursuant to Lane’s motions to set aside the District Court’s judgment; it 

is inherent to the legal consequences of a valid default judgment; and, upon remand, 

pursuant to Rules 15(a) and (b), M.R.Civ.P., may appear yet again in this litigation. 

¶38.Collateral estoppel prevents re-litigation of a particular issue or determinative 

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fact which was actually or necessarily decided in a prior action. See Boyd v. First 

Interstate Bank (1992), 253 Mont. 214, 218, 833 P.2d 149, 151. In Aetna Life, we 

adopted a three-part test for determining whether collateral estoppel applied: (1) was 

the issue decided in the prior adjudication identical with the one presented in the 

action in question? (2) was there a final judgment on the merits? (3) was the party 

against whom the plea is asserted a party or in privity with a party to the prior 

adjudication? Aetna, 207 Mont. at 413, 673 P.2d at 1279. We held that "collateral 

estoppel will bar litigation of an issue in a civil trial that has previously been litigated 

in a criminal trial when the requirements . . . have been met." Aetna, 207 Mont. at 

414, 673 P.2d at 1280 (emphasis added). 

¶39.We have since broadened the application of this doctrine to all cases in which 

collateral estoppel is at issue--namely, in any adjudication where a final judgment 

was rendered on the merits. See, e.g., In re Marriage of Holland (1986), 224 Mont. 

414, 416, 730 P.2d 410, 412 (holding that a parent who was delinquent in making 

child support payments was estopped from contesting paternity which had been 

previously adjudicated during a marriage dissolution); Aetna Life Ins. Co. v. 

McElvain (1986), 221 Mont. 138, 146-47, 717 P.2d 1081, 1086 (holding adjudication in 

South Dakota proceedings provided valid issue preclusion in Montana case between 

the same parties).

¶40.Most relevant to our discussion here is the test’s second prong, whether the 

default judgment serves as a final judgment on the merits, which could conceivably 

preclude Lane from contesting whether Brad Lane had committed the alleged acts. 

We hold it does not. 

¶41.To determine whether a final judgment on the merits has been reached, we look 

to see if the issue was "actually litigated and adjudged as shown on the face of the 

judgment." See Butler v. Brownlee (1969), 152 Mont. 453, 457, 451 P.2d 836, 838. 

This analysis requires two things: first, that the issue was effectively raised in the 

pleadings or through development of the evidence and argument at trial or on 

motion; and, second, that the losing party had a "full and fair opportunity" 

procedurally, substantively, and evidentially to contest the issue in a prior 

proceeding. In re Daily (9th Cir. 1995), 47 F.3d 365, 369; Bush v. Balfour Beatty 

Bahamas, Ltd. (11th Cir. 1995), 62 F.3d 1319, 1324-25 (finding Daily persuasive and 

stating two-part rule); Rafanelli v. Dale (1998), 1998 MT 331, ¶ 18, 292 Mont. 277, ¶ 

18, 971 P.2d 371, ¶ 18 (concluding that collateral estoppel applied to the purported 

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existence of an agreement where the "issue was fully litigated by counsel and 

deliberately considered by the court in its opinion"). See also Restatement (Second) 

of Judgments § 27 cmt. e (1982) (stating that an issue is not actually litigated "if it is 

raised by a material allegation of a party’s pleading but is admitted (explicitly or by 

virtue of a failure to deny) in a responsive pleading"). 

¶42.Based on the foregoing, we conclude that Lane, as the non-prevailing party, has 

not been afforded a full and fair opportunity to procedurally, substantively, and 

evidentially contest the relevant issues pertaining to any of Brad Lane’s acts that 

could, conceivably, prevent her recovery under her policy with Farmers. As 

concluded above, the default judgment merely restated the conclusory averments 

found in Farmers’ pleadings as proven facts, and in no sense were these relevant 

issues "actually litigated." 

¶43.Thus, the second question of the collateral estoppel test, was there a final 

judgment on the merits? cannot be answered affirmatively. Therefore, we hold that 

Lane cannot be precluded under the doctrine of collateral estoppel from litigating 

any issues pertaining to whether Brad Lane committed the alleged acts decreed by 

the default judgment.

¶44.Accordingly, the order of the District Court is reversed and this case is 

remanded for further proceedings consistent with this opinion. 

/S/ JAMES C. NELSON

We Concur:

/S/ J. A. TURNAGE

/S/ KARLA M. GRAY

/S/ JIM REGNIER 

/S/ W. WILLIAM LEAPHART

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