Weakly-Holt v. Foster , 179 Cal. Rptr. 3d 734 ( 2014 )

Filed 10/21/14
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT
KATHI WEAKLY-HOYT, F067626
Plaintiff and Respondent, (Super. Ct. No. 668595)
v.
OPINION
LAWRENCE H. FOSTER et al.,
Defendants and Appellants.
APPEAL from a judgment of the Superior Court of Stanislaus County. Hurl W.
Johnson III, Judge.
Bruce P. Grego for Defendants and Appellants.
Arata, Swingle, Sodhi & Van Egmond and George S. Arata for Plaintiff and
Respondent.
-ooOoo-
Defendant appeals from a default judgment entered against him, contending his
default was improperly entered because plaintiff failed to serve him with a statement of
damages prior to entry of his default, which denied him his last opportunity to plead to
the complaint and avoid a default. Because of the effect of the bankruptcy proceedings
on the claims against defendant, we find no error in the trial court’s proceedings and
affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff filed a medical malpractice complaint against defendant, a plastic
surgeon. Defendant did not answer the complaint, but apparently notified plaintiff that he
had filed a bankruptcy proceeding. On January 24, 2012, plaintiff obtained an order from
the bankruptcy court granting her relief from the automatic stay of proceedings against
the debtor. The order permitted her to proceed with her action, “so long as recovery
against debtor is limited to available insurance proceeds.” On July 19, 2012, plaintiff
requested, and the trial court entered, defendant’s default. On April 1, 2013, plaintiff
served on defendant’s insurer, with a courtesy copy to defendant, a notice of default
hearing, accompanied by a statement of damages; the statement of damages requested
$41,800 for future medical expenses, $1,400 for loss of earning capacity, and $250,000
for general damages. Plaintiff filed affidavits in support of her request for damages,
including the affidavit of an expert witness, who opined that defendant’s care and
treatment of plaintiff failed to meet the applicable standard of care, recommended further
treatment to alleviate the effects of defendant’s negligence, and estimated the cost of such
future care.
Defendant appeared at the default hearing, attempted to file a trial brief, and orally
argued that the matter could not proceed because he had not been served with a statement
of damages and the matter was stayed by his bankruptcy proceeding. The trial court
rejected defendant’s arguments, found plaintiff had proved her case, and awarded her
damages totaling $293,240, plus costs. Defendant appeals from the judgment,
contending plaintiff was required to serve him with a statement of damages before
requesting entry of default, plaintiff did not comply with that requirement, and when she
did serve a statement of damages, it acted as an amendment of the complaint, opened up
his default, and entitled him to an opportunity to file a response to the complaint.
2
DISCUSSION
Defendant contends plaintiff was required to serve a statement of damages on him
before she could enter a default and default judgment against him, and the statement of
damages, when served, opened up the default, so he should have been given an
opportunity to file a responsive pleading. Under the circumstances of this case, we
disagree.
The parties do not dispute the relevant facts; they differ only as to the legal
consequences of those facts. Interpretation of the applicable laws and their application to
undisputed facts present questions of law that are subject to de novo review. (Morgan v.
United Retail Inc. (2010) 186 Cal.App.4th 1136, 1142.)
The filing of a bankruptcy proceeding operates as a stay of “the commencement or
continuation … of a judicial … action or proceeding against the debtor that was or could
have been commenced before the commencement of the [bankruptcy] case.” (11 U.S.C.
§ 362(a)(1).) When a bankruptcy discharge is entered, it replaces the automatic stay with
a permanent injunction against such judicial proceedings. (In re Gibellino-Schultz
(Bankr. E.D. Pa. 2011) 446 B.R. 733, 738.)
The automatic stay and the postdischarge injunction affect only the personal
liability of the debtor; generally, they do not extend to third parties liable for the same
debt, such as insurers that insure against losses that are the subject of pending litigation
against the debtor. (Carway v. Progressive County Mut. Ins. Co. (Bankr. S.D. Tex. 1995)
183 B.R. 769, 774; Green v. Welsh (2d Cir. 1992) 956 F.2d 30, 35 (Green).) The
bankruptcy court may grant relief from the automatic stay to enable a plaintiff to proceed
with an action against the debtor, when the plaintiff seeks only to establish the debtor’s
liability, and there are no monetary consequences for the debtor, as opposed to the
insurer. (In re Fernstrom Storage & Van Co. (7th Cir. 1991) 938 F.2d 731, 735.) This
procedure is consistent with the purposes of a bankruptcy discharge. Congress intended
3
the discharge and permanent injunction provisions “to free the debtor of his personal
obligations while ensuring that no one else reaps a similar benefit.” (Green, at p. 34.)
They were “designed to give the debtor a financial ‘fresh start,’” not to “provide a
method by which an insurer can escape its obligations based simply on the financial
misfortunes of the insured.” (In re Jet Florida Systems, Inc. (11th Cir. 1989) 883 F.2d
970, 972, 975.) Discharge does not “preclude a suit tailored solely to determining the
debtor’s liability as a precondition for recovery against the debtor’s liability insurer.”
(Green, at p. 34.)
Defendant filed his bankruptcy proceeding prior to entry of default and default
judgment in plaintiff’s medical malpractice action. His bankruptcy filing had the effect
of automatically staying plaintiff’s action. Plaintiff obtained relief from the automatic
stay in order to proceed with her claim, to establish defendant’s liability so she could
recover from his liability insurer. Plaintiff’s motion for relief from the automatic stay
was granted only “as to the interest of the trustee”; it was “moot as to the interest of the
debtor.” The bankruptcy court’s order stated “[t]here is no bankruptcy impediment to the
continued prosecution of [the medical malpractice case], so long as recovery against
debtor is limited to available insurance proceeds.” Plaintiff obtained this relief before she
had the default and default judgment entered. Thus, at that time, plaintiff was barred by
the stay from proceeding against defendant to obtain a judgment holding him personally
liable for her alleged injuries; she could only obtain a determination of his liability as a
means of establishing her right to payment from defendant’s liability insurer.
Code of Civil Procedure section 425.101 provides in relevant part that, in an action
for “damages for personal injury or wrongful death, the amount demanded shall not be
stated” in the complaint. (Id., subd. (b).) In such an action, however, the plaintiff must
1 All further statutory references are to the Code of Civil Procedure unless otherwise
indicated.
4
serve on the defendant a “statement setting forth the nature and amount of damages being
sought” before a default may be taken. (§ 425.11, subds. (b), (c).) “The purpose of
[section 425.10] is to protect defendants from adverse publicity resulting from inflated
demands. [Citation.] Section 425.11 was designed to give defendants ‘one last clear
chance’ to respond to allegations of complaints by providing them with ‘actual’ notice of
their exact potential liability. [Citation.]” (Connelly v. Castillo (1987) 190 Cal.App.3d
1583, 1588.)
Service of a statement of damages on defendant personally was prohibited by the
automatic stay and would have served no purpose. The automatic bankruptcy stay
prevents either party from proceeding with the stayed action. (See Ingersoll-Rand
Financial Corp. v. Miller Mining Co. (9th Cir. 1987) 817 F.2d 1424, 1426-1427 [holding
that an appeal by the defendant-debtor, which was filed after commencement of the
debtor’s bankruptcy proceeding and challenged the judgment in favor of the plaintiff, was
automatically stayed because it was a continuation of a judicial proceeding against the
debtor].) The bankruptcy stay prevented plaintiff from proceeding against defendant
personally. It also prevented defendant from filing responsive papers in the medical
malpractice action.
The order granting relief from the stay permitted plaintiff to recover damages only
against defendant’s insurer. Accordingly, she served the statement of damages on the
insurer; she sent only a courtesy copy to defendant, making it clear she was not
attempting to proceed against him. Further, since plaintiff was not seeking any amount of
damages against defendant personally, there was no amount of damages to disclose to
him in a statement of damages. Thus, there was no need to give defendant a last chance
to plead to plaintiff’s complaint, after apprising him of the actual amount of his potential
liability; due to his bankruptcy filing and the bankruptcy court’s order granting limited
relief from the automatic stay, he faced no potential personal liability in plaintiff’s case.
5
Plaintiff contends only an aggrieved party may appeal a judgment (§ 902), and
defendant is not aggrieved by the judgment because his debt has been discharged and he
cannot be required to pay the judgment. In his reply brief, defendant suggests he is
aggrieved because he will be subject to other adverse consequences of the judgment
against him, such as mandatory reporting of the judgment to medical authorities (Bus. &
Prof. Code, § 801.01, subd. (a)(1).) Those nonmonetary consequences are irrelevant to
the purposes to be served by a statement of damages, however. The purpose of the
statement of damages is to notify defendants of the extent of their potential liability for
monetary damages, so they can make an informed decision whether to defend the action
or default, in cases where the plaintiff is prohibited from alleging the amount of damages
sought in the complaint itself. As discussed above, information about the extent of
defendant’s potential monetary liability was unnecessary because any judgment for
money damages could not be enforced against him.
Other potential consequences that might have affected defendant’s choice to
defend the action or default arose from the nature of claims made in the complaint, not
from the amount of damages sought. For example, defendant would face a potential
requirement to report the judgment under Business and Professions Code section 801.01
because the complaint alleged medical negligence. That potential would have been
apparent from the allegations of the complaint, regardless of the amount of monetary
damages sought; it would not have been affected by the service of a statement of
damages.
When plaintiff sought entry of defendant’s default and served the statement of
damages, she was proceeding only against the insurer. The statement of damages did not
amend the complaint in any respect relevant to defendant. It disclosed the damages
plaintiff was claiming, but defendant personally was not potentially liable for those
damages. The statement of damages did not change the nature of the claims being made
6
against defendant or the potential ancillary consequences of those claims. Consequently,
as to defendant, service of the statement of damages was not analogous to a substantive
amendment of the complaint, which affords a defendant affected by it another
opportunity to respond.2
Under the circumstances of this case, service of the statement of damages on
defendant was not necessary or permitted by the bankruptcy stay, would have served no
useful purpose, and did not open up the default and allow defendant to answer the
complaint.
DISPOSITION
The judgment is affirmed. Plaintiff is entitled to her costs on appeal.
_____________________
HILL, P. J.
WE CONCUR:
_____________________
LEVY, J.
_____________________
KANE, J.
2 When, after a defendant’s default has been entered, the plaintiff amends the complaint in
a matter of substance, the amendment opens the default, it must be served on the defendant, and
the defendant is entitled to an opportunity to respond. This rule does not apply when the
amendment is one of form, or one that is immaterial as far as the defaulting defendant is
concerned. (Leo v. Dunlap (1968) 260 Cal.App.2d 24, 27, 28.)
7