Lane v. Farmers Union Insurance

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-two-
year 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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