Opinion ID: 1934252
Heading Depth: 1
Heading Rank: 6

Heading: applicability of frow in this case

Text: 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 a controlling person of both corporations. A similar relationship between defendants was alleged in Nichiro Gyogyo Kaisha v. Norman, 606 P.2d 401, 404 (Alaska 1980), where the plaintiff alleged that two corporations acted as a single corporate entity in regard to the significant facts set forth in the amended complaint and are in essence the alter egos of each other. One of the corporations answered, but the other defaulted, and the plaintiff obtained a default judgment. Characterizing the claim as one alleging joint liability and citing the Frow doctrine, the court held that the default judgment was improperly entered because the answering defendant had not had an opportunity to defend on the merits. 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 between 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., 43 B.R. 257 (Bankr. E.D.N.Y.1984), where bankruptcy trustees alleged that debtors and other defendants fraudulently transferred assets to a corporate entity alleged to be an alter ego of the transferors. In determining that the Frow doctrine precluded entry of a default judgment against the transferee corporation where other defendants were not in default, the court reasoned that 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, 82 U.S. 552, (15 Wall. 552), 21 L.Ed. 60 (1872), a trial court should defer entering a default judgment against one of multiple defendants where doing so could result in inconsistent and illogical judgments following determination on the merits as to the defendants not in default. Under the alter ego and fraudulent transfer theories asserted by Florida, a trial on the merits could only result in the liability of both Truck and Agency or the liability of neither. However, the entry of default judgment against Truck could lead to the illogical and inconsistent result that Truck, the alleged fraudulent transferor, would be liable, whereas Agency, the alleged alter ego and fraudulent transferee, would not. Furthermore, in asserting its alternative theories of recovery, Florida alleges joint and collective action on the part of the defendants, as opposed to independent acts on the part of each named defendant. It alleges that defendants have converted plaintiff's trust funds to their own benefit, that defendants have failed and refused to turn over premiums collected, and that the transfer of the Truck business and assets and/or USAC premium to other entities constitutes unlawful distributions for the benefit of defendants in violation of their fiduciary obligations to USAC and plaintiff. In light of these allegations of alter ego, fraudulent transfer, and collective action, we construe the operative petition, taken as a whole, as alleging that the three named defendants are jointly liable as a single entity. Because the default judgment against Truck and a judgment on the merits in favor of 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, 204 Ga. App. 504, 420 S.E.2d 50 (1992); C.W. Matthews Contracting Company, Inc. v. Studard, 201 Ga.App. 741, 412 S.E.2d 539 (1991). To the extent that Grant v. Clarke, 58 Neb. 72, 78 N.W. 364 (1899), and German-American Bank of Milwaukee v. Stickle, 59 Neb. 321, 80 N.W. 910 (1899), are inconsistent with this determination, they are overruled. 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 statutory 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, 156 Neb. 1, 54 N.W.2d 227 (1952) (holding that amount of default judgment should have been limited to amount of damages established by evidence); Slater v. Skirving, 51 Neb. 108, 70 N.W. 493 (1897) (holding that necessity of proof on default arises only with respect to value or amount of damages). In the present case, no evidence was offered to substantiate the $4,997,210 in damages for which Truck was adjudged liable by default, and the district court therefore had an inadequate factual basis upon which to enter judgment against Truck. 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 default 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.