The opinion of the court was delivered by: Honorable Ronald E. Bush U. S. Magistrate Judge
MEMORANDUM DECISION AND ORDER
Pending before the Court is Defendants' Motion for Order to Show Cause (Dkt No. 23), as renewed by the request granted in the Order at Docket No. 40, and Plaintiffs' Motion to Lift Stay and Set Aside Default Judgment (Dkt No. 39). The parties have now consented to the jurisdiction of a United States Magistrate Judge (Dkt. 50).*fn1 Having considered the briefing and counsels' oral arguments, the Court enters the following Memorandum Decision and Order:
The Court held a show cause hearing to allow Plaintiffs' counsel to appear and show cause why sanctions should not be imposed for Plaintiffs' actions in this case. A related issue is whether the Court can set aside the default judgment Plaintiffs obtained in this case, pursuant to Plaintiffs' motion to set aside the default judgment. These motions stem from the events described below.
MPC Computers, LLC, and several related entities (collectively "MPC"), filed a Chapter 11 bankruptcy petition on November 6, 2008 in the U.S. District Court for the District of Delaware. See Swartz Aff., Ex. (Dkt. 24-1). The filing of this type of bankruptcy petition stays the commencement or continuation of a judicial proceeding against the debtor "or against the property of the debtor". United States v. Dos Cabezas Corp., 995 F.2d 1486, 1491 (9th Cir. 1993). See also 11 U.S.C. § 362(a). A stay under 11 U.S.C. § 362 is "automatic" and goes into effect upon the filing of a bankruptcy petition.
The Court was not made aware of MPC's bankruptcy filing at the time Plaintiffs' counsel first learned of it, on December 31, 2008. See Pl.'s Resp., App. A (Dkt. 24); Martin Aff., Ex. E (Dkt. 23-2). At that time, the Court Clerk had entered default in this case against Defendants MPC Computers, LLC Severance Plan for Employees ("MPC Plan") and John P. Yeros ("Yeros"). See Dkt. 9. Although the footer and some of the text refer to the document entered on December 29, 2008 as a "default judgment," the header identifies the document as a "Clerk's Entry of Default" upon which a "Clerk's Default Judgment" was entered on February 27, 2009 (Dkt. 16) and an "Amended Clerk's Default Judgment" on March 26, 2009 (Dkt. 18)-after Plaintiffs' counsel learned of the MPC bankruptcy filing.*fn2 On April 3, 2009, Plaintiffs' counsel-who was aware of the MPC bankruptcy on or shortly after December 31, 2008-recorded the Judgment in Colorado where Defendant Yeros resides, an action that formed the basis for Defendants' Motion for Order to Show Cause, as renewed and at issue again. See Yeros Aff., p. 2 (Dkt. 23-3).
The Court considered the timing of the filings because, had the Court been notified about the bankruptcy filing when Plaintiffs' counsel first became aware of it, the possible application of the automatic bankruptcy stay in this case could have been acknowledged after the default but before a judgment was entered on that default. The Court explained in a prior Order that it would have found that the stay extended to this lawsuit for reasons similar to those described by Judge Lodge in his Order upholding a stay in the case of McGuire v. MPC Computers, LLC Severance Plan, CV08-538-S-EJL (Docket No. 10). That is, because the MPC Plan is apparently unfunded and Defendants allege any benefits obtained by Plaintiffs under that Plan may be paid by the MPC debtors, the stay should extend to this lawsuit even though the MPC Plan is not named as a debtor in the bankruptcy.
Order (Dkt. 26) (citing McGuire, CV08-538-S-EJL (Aug. 26, 2009), Dkt. 10, p. 2)). As the Court has noted, the attorneys representing Plaintiffs in this case also represent the plaintiffs in the McGuire case, which is substantially similar to this case in terms of the named defendants, claims asserted, and relief sought.
Although an order staying the present case was not listed on the docket until Chief Magistrate Judge Candy W. Dale entered a docket entry order taking notice of the bankruptcy filing, a bankruptcy stay is an automatic stay that goes into effect on the date of the bankruptcy filing. On June 9, 2009, Judge Dale entered an order confirming that this case should be stayed pursuant to § 362(a), based on the information available to the Court at that time.
Because actions taken in violation of the automatic stay, i.e., since November 2008, may be void, see In re Schwartz, 954 F.2d 569 (9th Cir. 1992), the Court determined in this case that Plaintiffs may not enforce the judgment entered after the automatic stay became effective, without relief from the stay. Order (Dkt. 26). After the Court determined that the bankruptcy court is in the best position to determine whether this case is covered by the automatic stay and whether relief from that stay is appropriate, Plaintiffs sought relief from the stay in bankruptcy court.
Defendants initially filed a motion for order to show cause in February of 2010, requesting that Plaintiffs and their counsel "be held in contempt for willful, continuing and deliberate disobedience of [the] Court's June 9, 2009 Order which stayed this matter pursuant to 11 U.S.C. Section 362(a)." Mem. In Support, p. 2 (Dkt. 23-1). The Court denied the motion, without prejudice, after explaining that it would not address the issue of sanctions because "no action should be taken in this case [with] the automatic stay" in place. Order (Dkt. 26). The Court also explained that "it may be that Plaintiffs are entitled to relief from the stay, or that the bankruptcy court will determine the stay does not apply in this case." The Court ordered that Plaintiffs' counsel "seek relief from the stay in the bankruptcy court or a ruling from the bankruptcy court on whether the stay should even apply to this case" if Plaintiffs chose to maintain the judgment recorded in relation to Defendant Yeros's property, or to otherwise enforce the judgment. The Court cautioned that, "[i]f Plaintiffs choose to disregard the stay-and the court orders confirming that it applies in this case absent a bankruptcy court ruling to the contrary-the Court will set a hearing at which it will consider whether Plaintiffs and/or their counsel are in contempt of court and should be sanctioned for their actions."
Plaintiff sought relief from the bankruptcy court, which denied Plaintiffs' Motion for Determination on the Applicability of the Automatic Bankruptcy Stay to Non-Bankruptcy Debtors on September 7, 2010. Dkt. 39, Ex. 1. Bankruptcy Judge Peter Walsh explained at a hearing that the automatic stay "clearly applies" because if "the severance payment is to be made it's going to made out of the estate," and "[i]f it's made by Mr. Yeros, then he has an indemnification claim against the estate." Dkt. 35, Ex. C at p. 11 (8/26/10 hearing transcript).
Six days after the Bankruptcy Court entered its Order, Plaintiffs asked this Court to "lift" the bankruptcy stay so that they could remove the lien on Yeros's property. When denying Plaintiffs' Petition for Relief from Stay as moot on September 15, 2010, the Court explained:
All collection activities must be suspended when a bankruptcy stay is in effect. See United States v. Milwitt, 475 F.3d 1150, 1153 (9th Cir. 2007). Relief from the automatic bankruptcy stay is not required for Plaintiffs to remove the judgment recorded on Defendant Yeros's property ...