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Harlow v. Voyager Communications V

July 09, 1998


The opinion of the court was delivered by: Orr, Justice.

On discretionary review pursuant to N.C.G.S. § 7A-31 of a unanimous decision of the Court of Appeals, 127 N.C. App. 623, 492 S.E.2d 45 (1997), vacating an order entered by Beal, J., on 10 June 1996 in Superior Court, Mecklenburg County. Heard in the Supreme Court 26 May 1998.

The issue in this case is whether the Court of Appeals erred in vacating the trial court's order entering a default against defendant Voyager Communications V (Voyager). Specifically, we must determine whether a final judgment on the merits can be made separately against one defendant who is in default when there are multiple defendants who are alleged to be jointly and severally liable. This is an issue of first impression for this Court.

This case initially arose out of a claim of fraud and breach of fiduciary duty brought by plaintiffs, Richard and Jane Harlow, against defendants, Voyager, Carl Venters, and Jack McCarthy. Plaintiff Richard Harlow was employed by defendant Voyager from 1983 to 1993. During that time, Harlow was granted options and purchased a considerable amount of stock in defendant Voyager. Plaintiffs allege that defendants later made material misrepresentations concerning the value of defendant Voyager's stock which induced plaintiffs to sell their stock to defendants at a considerable loss and for substantially less than its actual value.

In the complaint, filed on 28 April 1995, plaintiffs alleged that defendants were jointly and severally liable for damages flowing from the fraud and breach of fiduciary duty. Defendants filed an answer on 28 June 1995 essentially denying the allegations of fraud and breach of fiduciary duty and claiming as defenses that plaintiffs failed to state a claim upon which relief could be granted and that they were estopped from bringing the action because plaintiff Richard Harlow, as an officer and director of defendant Voyager, knew or should have known of all circumstances and facts concerning the operations and financial condition of Voyager. Plaintiffs then filed a request for documents on 13 December 1995. While defendant Voyager did produce some of the requested documents, it failed to produce all requested documents essential to plaintiffs' claim. Subsequently, on 20 May 1996, plaintiffs moved to compel discovery, and the trial court responded by ordering defendant Voyager to produce all documents requested in discovery by 24 May 1996. However, once again, defendant Voyager failed to produce all the documents which plaintiff had requested.

On 31 May 1996, plaintiffs filed a motion to show cause for contempt and for sanctions. The motion was heard on 6 June 1996. Based upon the evidence presented at the hearing, the trial court entered the following Conclusions of law:

1. The Court's Order Compelling Discovery set a deadline of May 24, 1996 at 5:00 p.m. for Voyager V to produce all documents responsive to the Requests, which deadline was not met;

2. The Court's Order Compelling Discovery authorized Plaintiff's [sic] to set the time and place for the taking of Voyager V's deposition, which time and place was set by Plaintiff and willfully not attended by Voyager V;

3. Voyager V's failures to comply with the Court's Order Compelling Discovery were each willful, without justification or excuse and constitute civil contempt;

4. Voyager V's failures to comply with this Court'[s] Order Compelling Discovery are also sanctionable under Rule 37 of the North Carolina Rules of Civil Procedure; and

5. This Court has, independently of prior orders, considered less harsh sanctions but finds that, given the course of willful conduct by Voyager V, the sanctions imposed hereby are necessary and appropriate; however, the Court finds it unnecessary to impose sanctions for contempt.

Based upon these Conclusions of law, the trial court entered an order: (1) allowing plaintiffs' motion for contempt; (2) striking defendant Voyager's answer; (3) entering a default judgment against defendant Voyager; (4) ordering defendant Voyager to pay plaintiffs' costs in bringing the action for sanctions; and (5) ordering the clerk to "put this Action on for trial by jury to determine the amount of damage as to Voyager V, and all other issues as to the other Defendants." Subsequently, on 5 July 1996, plaintiffs filed a notice of voluntary dismissal as to the remaining defendants, Venters and McCarthy, leaving defendant Voyager as the lone defendant in default, with damages to be determined.

Defendant Voyager then appealed to the Court of Appeals, which, in a unanimous opinion, vacated and remanded the trial court's order of default. In the opinion below, the Court of Appeals held that "[u]nder North Carolina law, when a plaintiff alleges joint liability against multiple defendants of which only one defaults, a default judgment may not be entered against the defaulting defendant until after the court adjudicates the liability of the non-defaulting defendants." Harlow v. Voyager Communications V, 127 N.C. App. 623, 624, 492 S.E.2d 45, 46 (1997). Based upon this principle, the Court of Appeals determined that the trial court's order of default against defendant Voyager was premature because the liability of the other defendants had not been adjudicated. Thus, the Court of Appeals reversed the trial court.

In reaching its decision, the Court of Appeals relied on the case of Moore v. Sullivan, 123 N.C. App. 647, 473 S.E.2d 659 (1996), in which the court stated, "in a default judgment situation when a plaintiff has alleged joint liability, a default judgment should not be entered against the defaulting defendant if one or more of the defendants do not default." Id. at 650, 473 S.E.2d at 661. Instead, an entry of default should be entered against the defaulting defendant. Under this principle, the entry of default serves to cut off the defaulting defendant's right to participate in the trial on the merits of the other defendants. In effect, the defaulting defendant is locked out, and a final judgment against him must await the outcome or judgment of the remaining defendants. Id.

This principle was enunciated by the United States Supreme Court in Frow v. De La Vega, 82 U.S. 552, 21 ...

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