Opinion
F071677
05-11-2018
OAKHURST LODGE, INC., et al., Plaintiffs, Cross-defendants and Appellants, v. CHETAN PATEL, Defendant, Cross-complainant and Respondent.
Donna A. Standard for Plaintiffs, Cross-defendants and Appellants, No appearance for Defendant, Cross-complainant and Respondent.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. SCV008554)
OPINION
APPEAL from a judgment of the Superior Court of Madera County. Charles A. Wieland, Judge. Donna A. Standard for Plaintiffs, Cross-defendants and Appellants, No appearance for Defendant, Cross-complainant and Respondent.
-ooOoo-
This appeal involves two default judgments. The first default judgment was entered in favor of plaintiffs in February 2013 and was subsequently vacated as void because the underlying default was taken while an automatic bankruptcy stay was in effect. The second default judgment was entered in favor of the defendant and cross- complainant in March 2015 and remained in effect after the trial court denied a motion to set it aside pursuant to Code of Civil Procedure section 437.
All unlabeled statutory references are to the Code of Civil Procedure.
On appeal, plaintiffs contend their 2013 judgment should be reinstated and the 2015 judgment against them should be vacated. They argue only a bankruptcy court had jurisdiction to determine the default they obtained violated an automatic bankruptcy stay and, in any event, defendant waived the protections of the automatic stay. As to the 2015 judgment entered against them, plaintiffs contend (1) it was procedurally defective because no statement of damages was filed and served prior to entry of default and (2) the trial court abused its discretion in denying relief based on excusable neglect.
We conclude the trial court had the authority (i.e., jurisdiction) to determine whether the 2013 default it entered was void because the default violated an automatic bankruptcy stay. Also, the trial court's implied finding that defendant did not waive the protections of the automatic stay is supported by sufficient evidence and, thus, not erroneous. Therefore, the trial court correctly granted the motion to set aside the 2013 judgment.
In contrast, the trial court abused its discretion when it denied plaintiffs' motion to set aside and vacate the default. Due to the policy preference for resolving disputes on their merits, "any doubts as to th[e] showing [of excusable neglect] must be resolved in favor of the moving party." (New Albertsons, Inc. v. Superior Court (2008) 168 Cal.App.4th 1403, 1420.) Had this principle been applied below, the motion to set aside and vacate the default underlying the 2015 judgment would have been granted.
We therefore reverse the judgment.
FACTS AND PROCEEDINGS
Appellants in this matter are plaintiffs Oakhurst Lodge, Inc., a California corporation; Steven Kent Marshall; Jagdish (Jack) Patel; and Shailesh (Sam) Patel (collectively, plaintiffs). The three individuals own stock in Oakhurst Lodge, Inc. The corporation did business as Oakhurst Lodge and operated a lodge-type motel consisting of 60 units.
Respondent Chetan Patel (Chet) is the only defendant. He also is the cross-complainant and he named all four of the plaintiffs as cross-defendants (referred to as plaintiffs). Chet alleges he (1) owned 40 percent of the stock issued by Oakhurst Lodge, Inc., (2) was a director of the corporation, and (3) served as its president from May 2008 through September 2009. In this litigation, each side accuses the other of mismanagement of the business and misappropriation of assets. The Complaint
In September 2011, plaintiffs filed a complaint against Chet with causes of action for conversion, misappropriation, intentional misrepresentation, breach of fiduciary duty, and negligence. The complaint alleged Chet was the chief executive officer of Oakhurst Lodge from May 2008 until March 2010 and, after September 30, 2009, he completely controlled all operations of the corporation, including accounting, payroll, processing and paying taxes, credit card processing, bank loans and general activities. The complaint alleged that while Chet was in control he (1) misappropriated cash and credit card payments from transient lodgers for his personal use, (2) made a variety of unauthorized transfers, and (3) destroyed the corporation's accounting records while he engaged in the misappropriations.
In October 2011, after unsuccessful attempts at personal service, plaintiffs' complaint was served by substituted service. In addition, a copy was sent by mail to Chet's Livermore address. Chet did not respond to the complaint and a deputy clerk of court entered a default on December 22, 2011. Bankruptcy Case
On December 13, 2011—prior to the entry of default—Chet filed a voluntary petition under Chapter 13 in the United States Bankruptcy Court for the Northern District of California, Oakland Division. His petition was assigned case No. 11-72959. Chet represented himself in the bankruptcy proceeding. The list of creditors attached to Chet's petition listed ASC/Wells Fargo and Quality Loan Service Corp. The petition made no reference to plaintiffs' lawsuit.
The next day a "Notice of Chapter 13 Bankruptcy Case, Meeting of Creditors, & Deadlines" was prepared and filed. The notice was sent to nine recipients, including the Labor Commissioner, the State Board of Equalization, the Franchise Tax Board, the California Employment Development Department, ASC/Wells Fargo, and Quality Loan Service Corp. Plaintiffs and the trial court were not among those sent the notice.
On January 18, 2012, the bankruptcy court filed an order of dismissal stating the case was dismissed because (1) Chet had failed to comply with the court's order dated December 14, 2011, and (2) no objections to dismissal had been filed. The bankruptcy court's docket states the Chapter 13 trustee's final report and account was filed on March 9, 2012; the order discharging the Chapter 13 trustee was filed on March 15, 2012; and the bankruptcy case was closed on March 16, 2012. Chet's Motion to Set Aside
On January 25, 2012, Chet, acting as his own attorney, filed a motion to set aside default judgment. Chet's supporting declaration stated (1) he was not personally served; (2) he did not learn of the complaint until November 29, 2011, when he was going through his mail; (3) he reviewed the complaint, put it in what he thought was a good place, and intended to contact an attorney right away; (4) a week or so later he was unable to find the complaint and summons; (5) he found them in the second week of December; (6) he immediately checked the court's website and discovered a default had been entered; and (7) the lawsuit had no merit and he did not cause plaintiffs any damages. Chet's supporting declaration did not mention his bankruptcy case or the fact it had been dismissed seven days earlier.
In February 2012, plaintiffs filed an opposition to the motion to set aside the default and requested sanctions. Among other things, plaintiffs argued Chet had not complied with section 473 because he had misrepresented the facts and his application was not accompanied by a copy of the answer or other responsive pleading he proposed be filed.
On February 29, 2012, Chet's motion was argued and denied. Chet then filed a motion for reconsideration. The court denied Chet's motion to reconsider and ordered Chet to pay sanctions of $1,000 to plaintiffs' attorney. Entry of Default Judgment
In December 2012, plaintiffs filed a request for court judgment using mandatory Judicial Council form CIV-100 (rev. Jan. 1, 2007). Plaintiffs sought special damages of $2,460,000; general damages of $983,000; and punitive damages of $4,725,000. These requests totaled $8,168,000. Plaintiffs assert the trial court required them to send a statement of damages to Chet, which they served and filed on February 5, 2013.
On February 7, 2013, the trial court filed a judgment by default in the amount of $8,168,000 against Chet. Eight days later, a deputy clerk issued an abstract of judgment. Motion to Set Aside Void Default
Chet obtained legal representation and, on March 12, 2013, filed a substitution of attorney with the court. Chet's counsel filed a motion to set aside a void default and default judgment and a request for judicial notice of documents related to Chet's bankruptcy. The documents from the bankruptcy proceeding showed Chet's petition was filed on December 13, 2011, and was dismissed on January 18, 2012. Thus, the default entered by the clerk on December 22, 2011, occurred while the bankruptcy case was pending. The motion to set aside argued the default and the default judgment were void because the default was entered in violation of the automatic bankruptcy stay. A copy of a proposed answer to plaintiffs' complaint was attached to the motion.
Later in March 2013, plaintiffs filed an opposition to Chet's motion to set aside the default and default judgment. Plaintiffs argued Chet's (in pro per) filing of a bankruptcy petition was not in good faith, was frivolous and was for ulterior purposes. Plaintiffs argued none of the cases cited by Chet involved enforcing the automatic stay to defeat an entry of default where the bankruptcy case was summarily dismissed because the petitioner did not comply with a bankruptcy court order. Plaintiffs also argued an automatic stay may be annulled for equitable reasons.
Chet's reply to the opposition argued (1) his bankruptcy filing was in good faith; (2) plaintiffs' argument for annulment of the automatic stay on equitable grounds was speculative and, in any event, only the bankruptcy court had jurisdiction to decide that issue; and (3) the dismissal of the bankruptcy did not retroactively suspend the automatic stay.
On April 15, 2013, the trial court held a hearing on Chet's motion to set aside. After asking counsel if they had anything new to add to their papers and receiving negative answers, the court stated, "it seems to me that I should grant the motion." The court stated it had enough on its plate without pretending to be a federal judge and listed issues it did not think were for it to decide under the circumstances. The court described those issues as follows: "Whether [Chet's] filing of bankruptcy, with or without giving notice to everybody, including this Court and the plaintiff[s], whether he gave notice in his filing of this pending litigation and whether that was in good faith, bad faith, or just negligence." The court stated it was not within its authority to decide those issues and, alternatively, if such authority existed, it did not have enough information to decide them. The court stated the default was taken before the bankruptcy was dismissed and, therefore, it would set aside both the default and the default judgment.
The attorneys argued about the effect of the bankruptcy proceeding and counsel for plaintiffs contended Chet had waived arguments based on the automatic stay because he had not raised the stay in his two prior attempts to set aside the default. The court rejected the waiver argument, stating the automatic stay raised a jurisdictional issue that rendered the default void, jurisdictional issues could be raised at any time, and Chet was entitled to raise the issue even if it was a "third bite at the apple." Counsel for plaintiff also raised the possibility of getting an order from the bankruptcy court nullifying the automatic stay and requested a 90-day continuance to obtain such an order. The court decided to conditionally grant the motion to set aside the default and default judgment and set a hearing 90 days out with the expectation plaintiffs would seek whatever they thought they needed from the bankruptcy court. The court also granted Chet's request for judicial notice of the documents from his bankruptcy proceeding.
On April 19, 2013, four days after the hearing, Chet filed another motion to set aside the default and default judgment. The motion stated the default judgment was void because it was entered without due process and proper notice to Chet and, as a result, the court should exercise its discretion to set it aside. The motion argued plaintiffs had not provided proper notice of the amount of punitive damages sought and, thus, the inclusion of an award of punitive damages in the default judgment rendered it void. The motion also argued the default judgment was limited to the amount of damages demanded in the complaint. Plaintiffs filed an opposition to the motion.
Chet's motion stated plaintiff Oakhurst Lodge, Inc. was in bankruptcy at the time and referred to a case number indicating the bankruptcy had been filed in 2011. Chet argued he could defend against the corporation's lawsuit without violating the automatic bankruptcy stay protecting the corporation because the corporation had initiated the lawsuit. His motion cited three cases as support. (E.g. In re Merrick (Bankr. 9th Cir. 1994) 175 B.R. 333, 336.) At oral argument, counsel for plaintiffs argued for the first time to this court that the filing of the motions to set aside the default against Chet violated the automatic stay in Oakhurst Lodge, Inc.'s bankruptcy proceeding. We reject this argument because, among other things, counsel provided no authority refuting the cases Chet cited to the trial court.
Information about the bankruptcy proceeding of plaintiff Oakhurst Lodge, Inc. is sparse in the record presented to this court. However, a case management statement filed by Chet six months later (October 17, 2013) stated: "Both parties have filed for bankruptcy and each petition has been dismissed." This appears to mean that the bankruptcy proceedings of Chet and plaintiff Oakhurst Lodge, Inc. had been dismissed by that date, which is consistent with the representation by plaintiffs' counsel at oral argument that the corporation's bankruptcy proceeding had been dismissed in early June 2013.
After the July 15, 2013, hearing, the trial court filed an order granting the motion to set aside the default and the default judgment. The court found the December 22, 2011, default and the February 7, 2013, default judgment against Chet were void and of no force or effect. The court stated its order was final and unconditional. Reinstated Lawsuit
In September 2013, counsel for plaintiffs filed a motion to be relieved as counsel, stating the attorney-client relationship had deteriorated in that the president of the corporate defendant was unwilling to communicate with the attorneys or undertake requested tasks, such as producing documents. The court granted the request. Subsequently, counsel learned the lack of cooperation resulted from plaintiff Marshall's mental disability and severe depression.
On January 9, 2014, Chet filed a cross-complaint for damages alleging, as a shareholder of the corporation, claims for breach of fiduciary duty, illegal corporate loan, involuntary dissolution, accounting and declaratory relief. Chet's cross-complaint named the four plaintiffs as cross-defendants. Plaintiffs did not file a response to the cross- complaint. At oral argument, plaintiffs' counsel argued service of the cross-complaint was defective because it was mailed to addresses no longer used by plaintiffs. We do not reach the issue of defective service. Chet's Request for Default
Chet's inclusion of plaintiff Oakhurst Lodge, Inc. as a cross-defendant did not violate the automatic stay of the corporation's bankruptcy proceeding because that case had been dismissed before Chet's cross-complaint was filed. (11 U.S.C. § 362(c)(2)(B) [dismissal of bankruptcy proceeding terminates automatic stay].)
At oral argument, counsel for plaintiffs represented to this court that 13 months earlier (March 2017) Oakhurst Lodge, Inc.'s bankruptcy proceeding had been "reopened," which she argued reinstated the automatic stay and thereby invalidated all of the actions taken by Chet, even those before the reopening of Oakhurst Lodge, Inc.'s bankruptcy proceeding. Assuming the dismissal of the corporation's bankruptcy proceeding has been vacated and further assuming the automatic stay was reinstated, we find that plaintiff Oakhurst Lodge, Inc. has waived the protection of the automatic stay for purposes of this appeal. (See Tarakjian v. Krone (1987) 196 Cal.App.3d 1243, 1247 (Tarakjian) [defendant's action constituted waiver of protection of automatic stay].) Thus, the general rule that an appeal by a defendantdebtor is automatically stayed because the appeal is a continuation of a judicial proceeding against the debtor does not apply to this appeal. (See IngersollRand Financial Corp. v. Miller Mining Co. (9th Cir. 1987) 817 F.2d 1424, 14261427.) As to the effect of the stay (assuming it exists) on the further proceedings in the superior court after remand, we leave that question undecided.
On March 13, 2014, Chet filed a request for entry of a default on the cross-complaint filed on January 9, 2014, against the four plaintiffs. The request stated the judgment to be entered totaled $0.00. A deputy clerk entered the default that same day. Chet filed a case management statement in April 2014 stating he was in the process of preparing a default judgment and the plaintiffs/cross-defendants might file a motion to set aside the default. Chet's July 2014 case management statement referred to the default entered against the four plaintiffs and stated, "Both parties have filed for bankruptcy and each petition has been dismissed."
On July 31, 2014, Chet filed a request for court judgment on the cross-complaint filed January 9, 2014. It asked for a judgment in the amount of $641,508.50, which consisted of general damages and costs.
On August 4, 2014, an attorney representing Oakhurst Lodge and Steven Marshall (but not the other two plaintiffs) filed a motion to set aside and vacate the default and the default judgment. The motion stated the default and default judgment were entered due to Marshall's mental disability and severe depression.
Chet opposed the motion to set aside and objected to the declarations offered in support of the motion. Pursuant to a stipulation, the motion and a case management conference were set for hearing on September 22, 2014. At the hearing, the trial court expressed concerns about the evidence offered to support the assertion of debilitating mental problems and, as a result, continued the hearing for a month to enable the moving party plaintiffs to file a declaration from a physician who treated Marshall.
In October 2014, a declaration of Lance Gault, D.O., was filed, which stated Marshall "has been suffering from mental anguish due to his current legal [ba]ttles, which exacerbated his already underlying anxiety and depression." The declaration also stated Marshall's condition affected his ability to make decisions or undertake daily living necessities. Chet filed objections to the declaration, asserting the statements lacked foundation. After a hearing on October 21, 2014, the trial court denied the motion. As a result, the default entered on March 13, 2014, remained in effect. The Default Judgment
Chet's next step was to obtain a default judgment based on the default that had survived plaintiffs' challenge. On March 5, 2015, Chet filed a (1) case summary in support of default judgment, (2) memorandum of costs, (3) an exhibit record, and (4) partially completed default judgment on Judicial Council form JUD-100 (new Jan. 1, 2002). Chet claimed illegal loans constituted misappropriation of approximately $190,852. He also claimed breaches of fiduciary duty resulted in the real estate used in the corporation's business being lost in foreclosure. Chet calculated his 40 percent share of the business had a fair market value, less encumbrances, of $63,600.
The court held a default hearing, received Chet's exhibits, and made findings as to the alleged breaches of fiduciary duty. The court determined the damages totaled $92,590 and found Marshall was solely responsible for $28,990 of those damages and the remaining $63,600 was a joint and several liability of the Marshall, Jagdish Patel, and Shailesh Patel. The court also awarded costs of $825.50.
The trial court completed the default judgment form submitted by Chet. The completed form stated judgment was for cross-complainant Chet and against cross-defendants Oakhurst Lodge, Inc.; Steven Kent Marshall; Jagdish (Jack) Patel; and Shailesh (Sam) Patel. The default judgment, like the default, did not mention plaintiffs' complaint. Chet's counsel served a notice of entry of the judgment. The Appeal
In May 2015, plaintiffs filed a notice of appeal. On appeal, Chet's attorneys filed a motion to be relieved as counsel in June 2015 and Chet did not oppose the motion. In August 2015, this court granted the request. Chet has not filed a respondent's brief or otherwise appeared before this court, despite this court's letter advising him the appeal could be submitted for a decision based on the record and plaintiffs' opening brief.
DISCUSSION
The issues raised in plaintiffs' opening brief challenge two separate decisions of the trial court. First, they contend the court erred in setting aside the $8.1 million default judgment they obtained against Chet. Second, plaintiffs contend the court erred in denying the motion to set aside the default and default judgment for $93,415.50 that Chet obtained against them. I. PLAINTIFFS' DEFAULT AND DEFAULT JUDGMENT
A. Jurisdiction and the Automatic Bankruptcy Stay
Plaintiffs contends the trial court lacked the jurisdiction to determine the default against Chet violated an automatic bankruptcy stay. Based on this lack of jurisdiction, Plaintiffs contend the order setting aside the default and default judgment against Chet was erroneous and the judgment should be reinstated by this court.
A challenge to a trial court's subject matter jurisdiction raises a question of law, which we review de novo on appeal. (Robbins v. Foothill Nissan (1994) 22 Cal.App.4th 1769, 1774.) Plaintiffs' contention about the lack of jurisdiction presents the following legal question: Does a state court have the authority to determine whether an action taken by it, such as entry of a default, violated an automatic bankruptcy stay and, thus, was void? (See § 473, subd. (d) [court may "set aside any void judgment or order"].) We conclude it does.
1. California Case Law
In Sindler v. Brennan (2003) 105 Cal.App.4th 1350 (Sindler), a patient sued her plastic surgeon for medical malpractice. (Id. at p. 1351.) About nine months later, the surgeon filed bankruptcy proceedings and a notice of automatic stay. (Ibid.) As a result of procedural maneuvers, the state court dismissed the malpractice case while the bankruptcy case was pending. (Id. at p. 1352.) The federal court ultimately determined the malpractice action should be resolved in state court and remanded the action to the superior court. (Ibid.) The patient was not able to get the case moving again because of (1) the superior court's earlier dismissal order and (2) the destruction of the file after its return from the federal court. (Ibid.) The patient then filed a motion to set aside the dismissal order, return the case to the active list, and reconstruct the file. (Id. at p. 1353.) The patient's motion was denied and she appealed. The appellate court reversed the denial of her motion and remanded for reconstruction of the file. (Id. at p. 1354.)
In Sindler, the court identified the rules of law relevant to the motion to set aside the dismissal. First, a petition in bankruptcy creates an automatic stay of all proceedings against the debtor. (Sindler, supra, 105 Cal.App.4th at p. 1353.) Second, judicial proceedings in violation of the automatic stay are void. (Ibid.) Third, a motion under section 473, subdivision (d) is an appropriate procedural mechanism for obtaining an order setting aside a void judgment or order. (Sindler, supra, at p. 1353.) Applying these rules of law to the facts presented, the appellate court concluded "the trial court had no power to dismiss the case, and the dismissal was void." (Ibid.) Based on this lack of power or jurisdiction, the appellate court concluded "the dismissal must be set aside." (Id. at p. 1354.)
In short, the appellate court in Sindler (1) determined an earlier action by the superior court (i.e., the dismissal) was void because it violated the automatic bankruptcy stay and (2) directed that earlier action be set aside. Thus, Sindler provides an example of a state court doing what plaintiffs contend state courts lack the authority to do.
In Tarakjian, supra, 196 Cal.App.3d 1243, the defendant filed an appeal challenging the trial court's power to amend nunc pro tunc a default judgment entered against him to reflect the proper spelling of his name. (Id. at p. 1245.) The defendant argued the judgment being amended was void because it was rendered during the pendency of his bankruptcy in violation of the automatic stay provisions of 11 United States Code section 362. (Tarakjian, supra, at p. 1245.) The defendant argued the trial court had no jurisdiction to amend the void order.
The appellate court began its discussion by addressing its authority to decide issues involving the bankruptcy stay. (Tarakjian, supra, 196 Cal.App.3d at p. 1246.) The court concluded its "review of this case does not usurp the domain of the federal bankruptcy courts for two reasons." (Id. at p. 1246.) First, the defendant did not claim he was "currently in bankruptcy, which would give the federal courts jurisdiction over any matter affecting his property." (Ibid.) Second, the court concluded that once the bankruptcy court dismissed the defendant's petition, the bankruptcy court lost jurisdiction to make rulings regarding the automatic stay provisions. (Ibid., citing In re Income Property Builders, Inc. (9th Cir. 1982) 699 F.2d 963, 964.) This loss of jurisdiction was not countered by a showing that the bankruptcy court had expressly retained jurisdiction when it entered the dismissal. (Tarakjian, supra, at p. 1246.) As a result, the court concluded "there does not appear to be any reason why this matter may not now be decided by the state courts." (Ibid.) Thus, the court decided it had the authority (i.e., jurisdiction) to decide the issues involving the bankruptcy stay and the stay's effect on the state court lawsuit. Having established its authority, the court addressed and resolved the issues involving the bankruptcy stay.
The primary issue was framed by the defendant's argument "that the judgment against him was void because it was entered during his bankruptcy; therefore, the court could not amend the void [judgment]." (Tarakjian, supra, 196 Cal.App.3d at p. 1246.) The undisputed facts showed the motion to amend the judgment had been filed 10 days after the defendant's bankruptcy case was dismissed. (Ibid.) The appellate court decided the impact of the automatic stay by stating:
"[W]e find that appellant failed in his duty to list a known creditor in his bankruptcy petition, and, by his silence, led respondents to proceed in ignorance to a final judgment in state court. Because of his tacit consent to the state court judgment, appellant may not now assert the automatic bankruptcy stay provision in a belated attempt to bar respondents' collection efforts, particularly since the bankruptcy court's dismissal order releases appellant's property from the strictures of bankruptcy concepts." (Id. at p. 1247.)
In sum, the court determined it had the authority to decide the effect of the automatic stay and concluded the automatic stay did not render the default judgment void or preclude the trial court from amending the default judgment. As a result, it affirmed the judgment. (Tarakjian, supra, 196 Cal.App.3d at p. 1248.)
2. Cases from Other Jurisdictions
Judicial decisions from other states provide examples of state courts deciding a judgment in a state lawsuit was entered in violation of an automatic bankruptcy stay and, therefore, was void. Concluding a judgment violated the automatic stay and was void are precisely the determinations made by the trial court before it granted Chet's motion to set aside the default and default judgment.
In Howell v. Thompson (Tex. 1992) 839 S.W.2d 92, the Texas Supreme Court vacated a judgment entered by the court of appeals on the ground the lower court's "issuance of its opinion and judgment was void because it occurred after petitioner filed bankruptcy proceedings and during the pendency of the automatic stay provided by 11 U.S.C. § 362(a)(1)." (Howell v. Thompson, supra, 92.) Twenty years later, the Texas Supreme Court confirmed this view of state court authority by stating "a judgment that violates the automatic stay is void and subject to collateral attack in state court." (York v. State (Tex. 2012) 373 S.W.3d 32, 34, italics added.)
In McGuire v. Champion Fence & Constr., Inc. (Colo.App. 2004) 104 P.3d 327, the plaintiff-appellant argued "the trial court erred in denying her motion to set aside that part of the August 27, 2002, judgment dismissing the claims against defendant from this action because the judgment was entered in violation of the automatic stay provision of the Bankruptcy Code." (Id. at p. 329.) The appellate court agreed. (Ibid.) The court described a split in authority as to whether the automatic stay voided acts favorable to the bankruptcy petitioner. (Id. at pp. 329-330.) The court adopted the view that "the operation of the stay does not depend on the outcome of the proceedings and acts that favor the debtor are still void if they violate the automatic stay." (Id. at p. 330.) The court observed this conclusion was "consistent with the Colorado appellate decisions that have applied the automatic stay provision to preclude further action on a case." (Ibid.) Based on this analysis, the court concluded the trial court should have granted the plaintiff-appellant's motion to set aside the judgment as void. (Ibid.)
In Kliefoth v. Fields (Mo.App. 1992) 828 S.W.2d 714, the appellant argued the trial court erred by entering an order modifying a judgment to include another defendant because the order violated an automatic stay. (Id. at p. 715.) The Missouri Court of Appeals agreed, holding the trial court's judgment "violate[d] the bankruptcy court's automatic stay and is, therefore, void. 11 U.S.C. § 362(a)." (Id. at p. 716.) The court then dismissed the appeal without prejudice and remanded to the trial court. (Id. at p. 717.) The court noted the plaintiffs could seek a modification of automatic stay in bankruptcy court to permit the entry of a judgment against the bankruptcy debtor or, alternatively, could request a judgment against only the appellant. (Ibid.)
3. Conclusion
Based on the foregoing judicial decisions and the fact Chet's bankruptcy case was dismissed before the trial court addressed the March 2013 motion to set aside the void default and default judgment, we reach the following conclusions. The trial court had the authority (i.e., jurisdiction) to determine (1) whether the automatic bankruptcy stay was in effect when the default was entered, (2) whether the entry of the default violated the automatic stay, (3) the consequences of any violation of the automatic stay—specifically, whether the default was void from its inception and what impact the void default would have on a subsequent default judgment, and (4) whether Chet's conduct impliedly waived the protections of the automatic stay.
Accordingly, the trial court did not act in excess of it jurisdiction when it considered whether to set aside the default on the grounds the default violated the automatic bankruptcy stay and, therefore, was void. Furthermore, the documents presented adequately establish the timeline of events and support the trial court's finding that the automatic stay was in place when the default was entered in December 2011. Therefore, the trial court correctly determined the entry of the default violated the automatic stay.
B. Waiver of Automatic Stay's Protection
Plaintiffs contend the trial court should have determined Chet waived (1) the protections of the bankruptcy stay and (2) the claim the default and default judgment were void. (See Tarakjian, supra, 196 Cal.App.3d at p. 1247 [defendant's action constituted tacit consent to entry of judgment in violation of automatic stay].) California law defines waiver as the intentional relinquishment or abandonment of a known right or privilege. (In re Sheena K. (2007) 40 Cal.4th 875, 880, fn. 1.) Under this definition, waiver is based upon intent and, thus, presents a question of fact. (Smith v. Adventist Health System/West (2010) 182 Cal.App.4th 729, 745.) The intent to waive may be expressed in words, either oral or written, or implied by a party's conduct. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31.)
Our approach to the waiver issue begins by determining how the trial court resolved the issue. The court's written order filed July 25, 2013, did not explicitly address the waiver issue. The order stated the court's determination that the default and default judgment entered against Chet were void and, thus, the motion to set them aside should be granted.
A fundamental rule of appellate procedure states the order of the trial court is presumed correct and the appellant has the burden of affirmatively demonstrating error. (Denham v. Superior Court (1970) 2 Cal.3d 557, 564.) Under the presumption, the reviewing court must indulge all intendments and presumptions that support the trial court's order. (Ibid.) Thus, when an order is silent on a particular question, the reviewing court presumes the trial court decided the matter in a way that supports the order. (Tarakjian, supra, 196 Cal.App.3d at p. 1247, fn. 3.) When the particular question is a disputed issue of fact, the reviewing court interprets the trial court's decision to include implied findings of fact that are favorable to the order, provided such findings are supported by substantial evidence. (In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133; Madera Oversight Coalition, Inc. v. County of Madera (2011) 199 Cal.App.4th 48, 66 [presumption of correctness and implied findings of fact].)
Pursuant to the doctrine of implied findings of fact, we presume the trial court found Chet did not intentionally relinquish a known right when he failed to mention the automatic stay in his pro per motion to set aside the default and default judgment or in his pro per motion to reconsider. Besides being required by applicable law, this implied finding is consistent with the trial court's statement from the bench that it did not have enough information to determine whether Chet's handling of his bankruptcy case, which included failing to notify the court or the plaintiffs of the filing or the automatic stay, constituted bad faith or negligence.
As to the sufficiency of the evidence, we conclude the implied finding that Chet did not intentionally relinquish a known right is supported by substantial evidence. A party's subjective state of mind is a question of "fact that rarely is susceptible to direct proof and, therefore, involves the court examining the circumstances that existed at the time of the action in question and drawing inferences from those circumstances about the party's state of mind." (People v. Accredited Surety Casualty Co. (2014) 230 Cal.App.4th 548, 560, fn. 9.) The circumstantial evidence about Chet's state of mind includes the fact that he acted as a pro per litigant in filing the bankruptcy petition and the two challenges to the December 2011 default. The quality of his papers supports the inference that Chet is not an attorney and did not understand how an automatic bankruptcy stay worked. Also, the automatic stay and its effect on the default was not raised until Chet retained an attorney and the attorney substituted into this lawsuit. Since a right must be known before it can be relinquished intentionally, the court reasonably could find Chet lacked sufficient knowledge to waive the protections of the bankruptcy stay. Accordingly, the trial court's implied finding that Chet did not waive the protections of the automatic stay or the right to challenge the default as void are supported by sufficient evidence.
Therefore, the order granting Chet's motion to set aside the void default and subsequent default judgment is upheld. II. DEFAULT JUDGMENT ENTERED AGAINST PLAINTIFFS
A. Notice of the Amount of Damages Claimed
1. Section 580
Subdivision (a) of section 580 states that "[t]he relief granted to the plaintiff, if there is no answer, cannot exceed that demanded in the complaint, in the statement required by Section 425.11, or in the statement provided for by Section 425.115; but in any other case, the court may grant the plaintiff any relief consistent with the case made by the complaint and embraced within the issue." The primary purpose of this provision is to guarantee defaulting parties adequate notice of the maximum judgment that may be assessed against them. (Greenup v. Rodman (1986) 42 Cal.3d 822, 826.) In short, "a plaintiff cannot be granted more relief than is asked for in the complaint." (In re Marriage of Lippel (1990) 51 Cal.3d 1160, 1166.)
2. The Cross-Complaint
The statutory text leads us to consider what relief was "demanded in the [cross-] complaint." (§ 580, subd. (a).) Paragraph 18 of Chet's cross-complaint, which is part of a breach of fiduciary duty cause of action, stated plaintiffs invested corporate funds in risky business dealings, which resulted in a loss to the corporation of approximately $168,000. Paragraph 22 alleged the corporation had been "damaged in an amount to be ascertained at the time of trial but believed to be in excess of $500,000." The cause of action alleging an illegal corporate loan stated the three individual plaintiffs did not exercise the care required of corporate directors when they approved a $168,000 loan that later caused the corporation to go into bankruptcy. Consistent with these allegations, the prayer in Chet's cross-complaint requested damages for breach of fiduciary duty in an amount to be ascertained at time of trial but believed to be in excess of $500,000 and requested damages for an illegal corporate loan in an amount believed to be in excess of $168,000.
3. Notice of Amount of Potential Liability Was Adequate
At the hearing to determine the amount of the default judgment, the trial court determined Chet's damages totaled $92,590 and awarded costs of $825.50. The court explicitly found Marshall was solely responsible for $28,990 of those damages and the remaining $63,600 was a joint and several liability of Marshall, Jagdish Patel, and Shailesh Patel.
We conclude the trial court's award of damages in the default judgment did not violate the requirements of section 580, subdivision (a) because the amount awarded did not "exceed that demanded in the [cross-]complaint." As the cross-complaint provided plaintiffs with notice of the damages sought, there was no need for Chet to serve them with a statement of damages to provide them notice.
Similarly, we conclude the allegations of damages and the request for relief in the cross-complaint was adequate to satisfy the "due process requirement of notice of the degree of financial liability of a defaulting defendant." (Ely v. Gray (1990) 224 Cal.App.3d 1257, 1261.)
Accordingly, the trial court did not violate section 580 or plaintiffs' constitutional right to due process when it denied the motion to vacate the $93,415.50 default judgment entered in 2015.
B. Excusable Neglect and Abuse of Discretion
1. Statutory Text
Section 473, subdivision (b) provides that a "court may, upon any terms as may be just, relieve a party or his or her legal representative from a judgment ... or other proceeding taken against him or her through his or her mistake, inadvertence, surprise, or excusable neglect." It is well established that (1) the statute's use of the phrase "may, upon any terms as may be just, relieve" grants discretionary authority to the trial court and (2) appellate courts review the trial court's order under an abuse of discretion standard. (Zamora v. Clayborn Contracting Group, Inc. (2002) 28 Cal.4th 249, 257.)
2. Application of Abuse of Discretion Standard
Generally, the abuse of discretion standard of review is a deferential one. However, our Supreme Court has directed that deference is not appropriate where a trial court exercises its discretion to deny relief from a default under section 473. (Elston v. City of Turlock (1985) 38 Cal.3d 227, 235 (Elston).) Because of the strong public policy preference for the resolution of disputes on their merits, "[d]oubts are resolved in favor of the application for relief from default [citation], and reversal of an order denying relief results [citation]." (Ibid.) "Unless inexcusable neglect is clear, the policy favoring trial on the merits prevails." (Ibid.; cf. Zamora v. Clayborn Contracting Group, Inc., supra, 28 Cal.4th at p. 258 [superior court did not abuse discretion in granting relief].)
3. Was Inexcusable Neglect Clear?
Under the foregoing principles, the question whether the trial court properly denied relief under section 473 turns on whether inexcusable neglect by Marshall was clear. Marshall contends his omissions that resulted in the default's entry were excusable because of his mental disability and depression.
An error is excusable if a reasonably prudent person placed in the same or similar circumstances might have made the same error. (Solv-All v. Superior Court (2005) 131 Cal.App.4th 1003, 1007.) Courts generally acknowledge that the party moving for relief has the burden of showing that the mistake, inadvertence, surprise, or neglect was excusable. (Zamora v. Clayborn Contracting Group, Inc., supra, 28 Cal.4th at p. 258.) This burden, however, is affected by the strong policy preference for resolution of disputes on their merits. Because of the policy, "any doubts as to that showing must be resolved in favor of the moving party." (New Albertsons, Inc. v. Superior Court, supra, 168 Cal.App.4th at p. 1420; see Elston, supra, 38 Cal.3d at p. 235.)
Here, the trial court did not resolve the doubts as to Marshall's showing in favor of the moving party. Consequently, the court failed to follow the principle set forth in New Albertsons, Inc. v. Superior Court, supra, 168 Cal.App.4th 1403, at page 1420. This failure to follow applicable law constitutes an abuse of discretion. Had the doubts as to Marshall's showing been resolved in favor of the moving parties, the August 2014 motion for relief from the default would have been granted.
In view of this determination, we do not address the other grounds raised by plaintiffs, which include defective service of the cross-complaint, defective service of the default, and the voidness of the judgment against plaintiff Oakhurst Lodge, Inc. due to the purported reinstatement of its bankruptcy proceeding and the automatic stay. (See fns. 2 & 3, ante.) As to the latter issue, it would not provide relief to the three individual plaintiffs named by Chet as cross-defendants because the automatic stay protects only the debtor corporation and does not extend to them. (See Cross v. Cooper (2011) 197 Cal.App.4th 357, 365 [automatic stay of judicial proceeding against a debtor in bankruptcy does not apply to nondebtor codefendants]; U.S. v. Dos Cabezas Corp. (9th Cir. 1993) 995 F.2d 1486, 1491.) Our reversal of Chet's default judgment on another ground as to all four plaintiffs means we need not address whether the default judgment is void only as to the corporation.
DISPOSITION
The judgment is reversed and the matter remanded for further proceedings. The trial court is directed to vacate its October 21, 2014, order denying plaintiffs' motion to set aside and vacate default and/or default judgment and to enter a new order granting the motion. The parties shall bear their own costs on appeal.
/s/_________
FRANSON, J. WE CONCUR: /s/_________
POOCHIGIAN, Acting P.J. /s/_________
MEEHAN, J.