Cline v. Davis

Filed 8/28/07 Cline v. Davis CA1/4

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FOUR

Federal bankruptcy law imposes an automatic stay on civil actions by or against debtors in state court while the bankruptcy case is pending. In this case, defendants had commenced a bankruptcy action before this state court suit was commenced by the plaintiffs. Also, while the bankruptcy proceeding was pending, defendants joint default was entered in violation of the automatic stay. After defendants bankruptcy case was dismissed, the state court default ripened into a default judgment. We conclude that the violation of the automatic stay rendered the underlying default void, and that as a result, the ensuing judgment was also void. Accordingly, we reverse the trial courts order denying defendants motion for relief from the default, and the resulting judgment.

facts and procedural history

On April 6, 2004, respondents Tamara Cline, Donna Perez, and Jennifer Vogel (plaintiffs) filed a complaint in the Contra Costa County Superior Court against appellants Gwendolyn R. Davis and Ben Davis, Jr. (defendants), and against two business entities, B&G Telephone Enterprises and B & G Medical Communications (collectively B&G), not parties to this appeal, that were allegedly owned by defendants. The complaint in the superior court action alleged that plaintiffs were former employees of B&G who had not received the full wages and other compensation due to them for work performed between July 2000 and January 2004. Plaintiffs pleaded causes of action against defendants and B&G for unfair business practices, violations of the Labor Code, and breach of contract.

Apparently unbeknownst to plaintiffs, defendants had filed a petition for bankruptcy on January 28, 2004, which was still pending at the time plaintiffs complaint in the superior court action was filed. Plaintiffs never sought or obtained relief from the bankruptcy stay in order to proceed with the superior court action.

The summons and complaint in the superior court action were served on defendants on April 13, 2004, and proofs of service were filed with the superior court two days later. Defendants did not answer the complaint, and their joint default was entered by the superior court clerk on June 2, 2004. Defendants bankruptcy was still pending on that date.

On August 23, 2004, the superior court held a case management conference. Defendant Ben Davis, Jr., appeared without counsel and informed the court and opposing counsel that he had filed for bankruptcy before plaintiffs filed their complaint. The superior court continued the matter for further hearing on September 27, 2004. On that date, defendants bankruptcy counsel appeared on their behalf, and the superior court stayed the proceedings before it due to the pendency of defendants bankruptcy proceedings.

Plaintiffs filed claims in the bankruptcy court on October 20, 2004. On February 13, 2006, defendants objected to the claims on the ground that they had ceased operating B&G in 2000, having turned it over to relatives that year, and accordingly, they were not plaintiffs employers at the time their claims for unpaid wages and benefits arose.

On March 30, 2006, the judge in defendants bankruptcy case dismissed the case on defendants motion. On May 12, 2006, plaintiffs counsel filed a notice in the superior court stating that the bankruptcy had been dismissed, and attaching a copy of the bankruptcy courts order. On May 15, 2006, the superior court clerk filed a notice of default hearing, which plaintiffs counsel served on defendants bankruptcy counsel on May 17, 2006. Defendants did not appear at the ensuing default hearing, which was held on June 14, 2006. On the date of the hearing, the superior court entered a default judgment in favor of plaintiffs. On June 23, 2006, plaintiffs counsel sent a copy of the default judgment to defendants bankruptcy counsel, who responded by leaving a voicemail message stating that he was no longer representing them.

On November 1, 2006, defendants filed a motion in the superior court to set aside the default judgment and their earlier default, and to dismiss the action. Plaintiffs opposed the motion. The superior court denied defendants motion on December 19, 2006, on the ground that default was entered and served on defendant[s] before plaintiff[s] [were] aware of the bankruptcy and before this action was stayed [by the superior court] on 9/27/04. This timely appeal ensued.

discussion

The issues presented by this appeal are purely questions of law regarding the validity of the default judgment taken against defendants. Accordingly, our standard of review is de novo. (See generally Barella v. Exchange Bank (2000) 84 Cal.App.4th 793, 797-798.)

Upon the filing of a bankruptcy proceeding, federal bankruptcy law imposes an automatic stay on all state and federal proceedings against the debtor outside the bankruptcy court, subject to certain statutory exceptions not relevant here. (See generally 40235 Washington Street Corp. v. Lusardi (9th Cir. 2003) 329 F.3d 1076, 1080; In re Schwartz (9th Cir. 1992) 954 F.2d 569, 570-572 (Schwartz).) More specifically, 11 U.S.C.  362(a)(1) automatically stays the commencement or continuation . . . of a judicial . . . proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy] case . . ., or to recover a claim against the debtor that arose before the commencement of the [bankruptcy] case. This provision is commonly referred to as the automatic stay.

[T]he automatic stay plays a vital role in bankruptcy. It is designed to protect debtors from all collection efforts while they attempt to regain their financial footing. (Schwartz, supra, 954 F.2d at p. 571, italics added.) The scope of protections embodied in the automatic stay is quite broad, and serves as one of the most important protections in bankruptcy law. (Eskanos & Adler, P.C. v. Leetien (9th Cir. 2002) 309 F.3d 1210, 1214 (Eskanos).)

State courts in which actions against the debtor are pending do not have the power to modify the automatic stay; only the bankruptcy court can do so. (In re Gruntz (9th Cir. 2000) 202 F.3d 1074, 1082-1083 [en banc].) The California courts have recognized this principle, holding, for example, that a creditor must obtain relief from the automatic bankruptcy stay to pursue a family law matter in state court when the family law matter is a core bankruptcy proceeding, and that the bankruptcy court has exclusive jurisdiction to determine whether [such a proceeding] is excepted from the automatic bankruptcy stay. (In re Marriage of Spiegel-Sprague (2003) 105 Cal.App.4th 215, 216-217, 220 (IRMO Sprague) [entry of order characterizing attorney fees owed by debtor in dissolution proceeding as nondischargeable support violated automatic stay, and order was accordingly void].)

The automatic stay is, as its name indicates, automatic. It is self-executing and is effective upon filing the bankruptcy petition. (IRMO Sprague, supra, 105 Cal.App.4th at p. 219.) It applies whether or not the creditor is even aware of the bankruptcy. (See Schwartz, supra, 954 F.2d at p. 570 [invalidating federal tax assessment made in violation of automatic stay despite IRSs lack of knowledge of taxpayers pending bankruptcy].)

The Bankruptcy Code does not burden the debtor with a duty to take additional steps to secure the benefit of the automatic stay. (Schwartz, supra, 954 F.2d at p. 572.) Thus, a debtors failure to challenge a creditors automatic stay violation in the bankruptcy court during the pendency of the bankruptcy proceeding does not bar the debtor from doing so at a later date. (See id. at pp. 570-571, 575 [tax assessment entered in violation of automatic stay during debtors first bankruptcy was void, despite debtors failure to challenge it until after dismissal of first bankruptcy; tax lien based on assessment therefore could not be enforced against debtors in their second bankruptcy].)

By the plain terms of the statute, the automatic stay precludes the continuation, not merely the commencement, of state judicial proceedings to collect on a claim against the debtor. (Eskanos, supra, 309 F.3d at p. 1214.) This principle is so powerful that during the pendency of the automatic stay, even actions by the state court that benefit the debtor, and which the debtor subsequently seeks to uphold, are nonetheless void for lack of jurisdiction. (Sindler v. Brennan (2003) 105 Cal.App.4th 1350 [dismissal of medical malpractice action by state court, after removal to federal court due to defendant doctors bankruptcy, violated automatic stay; after remand to state court, plaintiff was entitled to order setting aside dismissal].) If a state court proceeds without the creditor obtaining relief from the automatic stay, the state court risks having its final judgment declared void. (IRMO Sprague, supra, 105 Cal.App.4th at p. 222.)

The mere maintenance of an active collection action alone adequately satisfies the statutory prohibition against continuation of judicial actions. (Eskanos, supra, 309 F.3d at p. 1215.) Thus, the Ninth Circuit held in Eskanos that when a state court collection action against a debtor is initially filed after the automatic stay goes into effect, the creditor has an affirmative duty to dismiss the action, and can be sanctioned for a willful violation of the automatic stay for refusing to do so promptly upon learning of the bankruptcy. (Id. at pp. 1214-1215.)

In the present case, unlike in Eskanos, supra, 309 F.3d 1210, there is no suggestion that plaintiffs violation of the automatic stay in filing the action was willful. Moreover, defendants did not request that plaintiffs dismiss their case due to defendants bankruptcy, and do not argue on appeal that its continued pendency, after the issuance of the state courts own stay, violated the automatic stay.

Nonetheless, defendants default was entered while they should have been protected from that eventuality by the automatic stay. By the time the bankruptcy was dismissed and the automatic stay lapsed, the damage had been done, because defendants were already in default in the superior court action.

Respondents do not seriously dispute the validity of the above principles, or their applicability to this case. Rather, they argue that defendants were not entitled to set aside the default judgment because the judgment, unlike the default on which it was based, was not entered until after defendants were dismissed from the bankruptcy, thus dissolving the automatic stay and reinstating the superior courts jurisdiction. This argument is of no avail, however.

The case on which respondents rely, Thomas v. Gordon (2000) 85 Cal.App.4th 113, involved an action by the debtor, which was not filed until after the dismissal of her bankruptcy. Thus, it did not involve any state court action taken in violation of the automatic stay, as occurred here. Accordingly, it has no bearing on the present case.

Because of the automatic and all-encompassing nature of the automatic stay, many courts have specifically held that violations of the automatic stay are void and not merely voidable. (Schwartz, supra, 954 F.2d at p. 572, italics added.) In Schwartz, supra, 954 F.2d at p. 571, the Ninth Circuit explicitly adopted this majority rule. (Accord, In re Gruntz, supra, 202 F.3d at p. 1082, fn. 6 [[J]udicial proceedings in violation of the [automatic] stay are void ab initio . . . .].) The California courts also recognize this rule. (Sindler v. Brennan, supra, 105 Cal.App.4th at p. 1353 [Judicial proceedings in violation of the automatic stay are void. [Citations]].) Thus, because the superior court clerks entry of default in this case occurred while appellants bankruptcy was pending, it was entirely void and invalid.

Moreover, under California law, any judgment entered after an invalid default is also invalid. (Schwab v. Southern California Gas Co. (2004) 114 Cal.App.4th 1308, 1320 [defaults, and therefore default judgments, were void as to defendants not properly served with statements of damages prior to entry of defaults].) A default judgment that is based on the improper entry of default by the clerk is void, not just voidable, and therefore can be set aside at any time. (Baird v. Smith (1932) 216 Cal. 408, 410 [where clerk entered default before expiration of defendants time to answer, ensuing default judgment was void].)

In short, the original entry of defendants default by the superior court clerk was void as a violation of the automatic stay, even though neither plaintiffs nor the superior court were aware of defendants bankruptcy at the time. As a result, the ensuing judgment was necessarily void as well, despite the intervening dismissal of defendants from the bankruptcy case, and notwithstanding defendants delay in filing the motion to set aside the default and default judgment. Accordingly, the superior courts order denying defendants motion to set aside the default and default judgment must be reversed.

disposition

The order appealed from is reversed. This matter is remanded to the superior court with directions to vacate its order, and to enter a new order granting defendants motion. Appellants shall recover their costs on appeal.

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Ruvolo, P. J.

We concur:

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Reardon, J.

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Sepulveda, J.

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