TOMMY E. PACE AND DONNA PACE v. COMMONWEALTH OF KENTUCKY, NATURAL RESOURCES AND ENVIRONMENTAL PROTECTION CABINET
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RENDERED: January 8, 1999; 2:00 p.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
1996-CA-003492-MR
TOMMY E. PACE AND DONNA PACE
APPELLANTS
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE ROGER L. CRITTENDEN, JUDGE
ACTION NO. 94-CI-01492
v.
COMMONWEALTH OF KENTUCKY,
NATURAL RESOURCES AND
ENVIRONMENTAL PROTECTION
CABINET
APPELLEE
OPINION
REVERSING AND REMANDING
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BEFORE:
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GARDNER, JOHNSON and MILLER, JUDGES.
MILLER, JUDGE:
Tommy and Donna Pace (hereinafter referred to
collectively as "the Paces") appeal from an order of the Franklin
Circuit Court entered on December 13, 1996, which denied the
Paces' motion to set aside a default judgment in favor of the
Natural Resources and Environmental Protection Cabinet (the
Cabinet).
We reverse and remand.
The Paces were shareholders, officers, and directors of
K.O.K. Contractors, Inc. (KOK), which was involved in surface
mining.
KOK had its charter administratively dissolved on
November 11, 1991.
Following administrative proceedings, the
Cabinet filed an order on June 2, 1992, which dismissed the Paces
"as parties hereto without prejudice on the part of the Cabinet
to bring an action in the future against the individuals", and
imposed upon KOK a civil penalty of $23,200 for failure to submit
water quality reports.
The Cabinet filed another order on July
7, 1992, which named only KOK as the defendant and fined KOK a
civil penalty of $121,580 for environmental violations.
Paces were not mentioned in the second order.
The
KOK did not make
any payments on the fines.
On September 30, 1994, the Cabinet filed a complaint in
the Franklin Circuit Court listing KOK and the Paces,
individually, d/b/a KOK, as defendants and seeking to enforce the
previous orders.
The relevant language of the complaint is as
follows:
1. This action is brought pursuant to KRS
Chapter 350.
. . .
3. Defendants Tommy E. Pace and Donna G.
Pace, were shareholders, officers and
directors of . . . [KOK], from charter to
administrative dissolution.
4. Defendant . . . [KOK] is the alter ego
of the Defendants, Tommy E. Pace and Donna G.
Pace, and they have conducted, managed, and
controlled the affairs of the Corporation as
though it were their own business, and they
have used Defendant Corporation to defraud
Plaintiff and others similarly situated.
5.
On June 2, 1992, the Secretary of the
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Natural Resources and Environmental
Protection Cabinet filed a Final Order . . .
requiring Defendants to pay a civil penalty
of twenty-three thousand two hundred thirty
dollars [sic] ($23,200) within thirty days
after entry of the Order. . . .
6. Defendants have failed to pay
Plaintiff the civil penalty of twenty-three
thousand two hundred thirty dollars [sic]
($23,200) and that amount is now due and
owing.
The complaint made similar allegations regarding the $121,580
civil penalty and requested that "the Defendants, jointly and
severally, be ordered to pay" the civil penalties, costs, and an
additional $10,000 civil penalty for failure to heed the earlier
orders.
The Paces were served with the complaint, yet failed to
appear.
On January 22, 1996, the Cabinet filed a motion for
default judgment which the trial court granted two days later.
In April 1996, the Paces' bank accounts were unsuccessfully
garnished but in October 1996, garnishment began on Donna's
wages.
In early November 1996, the Paces filed a motion to set
aside the default judgment.
The Paces argued that since the
Cabinet's first order dismissed them, only KOK could be held
liable.
The Cabinet noted that under Kentucky Rules of Civil
Procedure (CR) 55.02 the Paces were required to show good cause
to set aside the default judgment; that the defense asserted by
the Paces was without merit; and that the motion to set aside was
not brought in a reasonable amount of time.
The Paces responded
that they merely had to make the motion within a year of the
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judgment under CR 60.02(a) since it was based on "mistake,
inadvertence, surprise or excusable neglect . . ." and that the
Cabinet would not be unduly prejudiced by setting aside the
judgment.
The Franklin Circuit Court denied the Paces' motion to
set aside the judgment.
This appeal followed.
The Paces argue that the trial court erred in refusing
to set aside the default judgment under CR 55.02 and CR 60.02.
CR 55.02 states:
"For good cause shown the court may set aside a
judgment by default in accordance with Rule 60.02."
CR 60.02
states, in part:
On motion a court may, upon such terms as are
just, relieve a party or his legal
representative from its final judgment,
order, or proceeding upon the following
grounds: (a) mistake, inadvertence, surprise
or excusable neglect; . . . The motion shall
be made within a reasonable time, and on
grounds (a), (b), and (c) not more than one
year after the judgment, order, or proceeding
was entered or taken.
Setting aside a default judgment is, of course, a
matter of discretion with the trial court.
See Howard v.
Fountain, Ky. App., 749 S.W.2d 690 (1988).
The court should
adopt a liberal attitude in considering same.
Collins, Ky., 481 S.W.2d 85 (1972).
See Ryan v.
Under the circumstances of
this case, we are of the opinion that the court abused its
discretion and that the Paces should have been given an
opportunity to defend the action in Franklin Circuit Court.
Default judgments are not favored.
See id.
To set aside the default judgment, the Paces must show,
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in a timely manner, good cause for failing to defend and a
meritorious defense to the judgment.
CR 55.02; see Dant v.
Progress Paint Manufacturing Company, Ky., 309 S.W.2D 187 (1958),
and Howard, 749 S.W.2d 690.
burden.
We believe the Paces have met their
As to “good cause”, the Paces state:
Relying upon the plain language of the
Secretary's orders, the Appellant's [sic]
were unaware that they were to be held
liable, due to the fact that the first Order
specifically states that they were dismissed
and the second Order does not list the
Appellants as Defendants.
The Paces obviously did not believe that they were liable in the
circuit court action as they had been individually dismissed as
parties in the administrative arena.
It is, indeed, easy to
understand the confusion of a lay person in this regard.
The Cabinet seeks to impose liability upon the Paces by
piercing the “corporate veil.”
As to a “meritorious defense”, we
harbor grave doubt about whether the facts of this case justify
piercing the corporate veil and imposing personal liability upon
the Paces.
The use of that doctrine to impose personal liability
upon corporate officials is reluctantly utilized.
See Holsclaw
v. Kenilworth Insurance Company, Ky. App., 644 S.W.2d 353 (1982).
We view as specious the claim that KOK was the Paces' “alter ego”
and that KOK engaged in fraudulent practices.
As such, we think
the trial court abused its discretion by refusing to set aside
the default judgment.
It seems to us that if a civil penalty is
to be imposed upon the Paces, it must be in conformance with the
precepts enunciated in KRS 350.990(9).
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See Natural Resources and
Environmental Protection Cabinet v. Williams, Ky., 768 S.W.2d 47
(1989).
For the foregoing reasons, the order of the Franklin
Circuit Court is reversed, and this cause is remanded for
proceedings consistent with this opinion.
GARDNER, JUDGE, CONCURS.
JOHNSON, JUDGE, DISSENTS AND FILES A SEPARATE OPINION.
JOHNSON, JUDGE, DISSENTING.
I respectfully dissent.
The trial
court has broad discretion in the matter of default judgments;
and an appellate court should not disturb the trial court's
action except upon a showing of an abuse of discretion.
Howard
v. Fountain, Ky. App., 749 S.W.2d 690, 692 (1988); Richardson v.
Brunner, Ky., 327 S.W.2d 572, 574 (1959).
The Court in
Richardson, stated as follows:
Let us consider the first motion to vacate
under CR 60.02. For the purpose of this
discussion we shall assume that the
defendant, Richardson, had a valid defense.
While highly questionable we shall likewise
assume that he properly defined the defense
in his motion. This does not of itself
entitle the defendant to the relief sought.
He must explain why he did not present that
defense upon the trial and thus excuse his
default.
Id. at 573 (citations omitted and emphasis added).
See also
Howard, supra; Jacobs v. Bell, Ky., 441 S.W.2d 448 (1969); and
Dant v. Progress Paint Manufacturing Co., Ky., 309 S.W.2d 187
(1958).
Thus, the Paces must show both that they had a valid
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defense and that their failure to timely assert that defense is
excusable.
I believe there may have been material issues of fact
as to a defense that the Paces could possibly have raised;
however, I would hold that the trial court did not abuse its
discretion in ruling that the delay in asserting a defense was
not excusable.
As to the defense actually raised, the Paces claim that
their dismissal in the Cabinet's first order precluded the
Franklin Circuit Court from having jurisdiction over them.
They
claim that the Cabinet cannot rely on its orders to enforce a
judgment against them since only KOK was determined to be liable.
However, the Cabinet brought the circuit court action to enforce
the Cabinet’s orders under KRS 350.990; and in an attempt to hold
the Paces liable, it alleged the common law "alter ego" method of
"piercing the corporate veil."
See White v. Winchester Land
Development Corp., Ky. App., 584 S.W.2d 56, 61-62 (1979).
The
Cabinet alleged that the Paces were individually liable for KOK's
debt since the corporation was the alter ego of the Paces; the
Paces conducted the business of KOK as if it were their own
business; and the Paces used KOK to defraud the Cabinet and
others.
While I have serious questions as to whether the Paces
had a valid defense as to the jurisdiction of the circuit court,
I recognize that there may have been some factual issues
concerning the Cabinet’s allegation that KOK was the alter ego of
the Paces.
However, even if I were to assume that the Paces may
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have had a valid defense, the Paces simply never explained why
they did not respond to the complaint and why they should be
relieved from the judgment because of "mistake, inadvertence,
surprise or excusable neglect."
Under these circumstances, I
cannot conclude that the trial court abused its discretion in
refusing to set aside the default judgment.
I would affirm the
judgment of the Franklin Circuit Court.
BRIEFS FOR APPELLANTS:
BRIEF FOR APPELLEE:
Hon. Otis Doan, Jr.
Harlan, KY
Hon. Don R. Stephens, Jr.
Frankfort, KY
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