Mathews Cadillac, Inc. v. Phoenix of Hartford Ins. Co.
| Decision Date | 26 February 1979 |
| Court | California Court of Appeals Court of Appeals |
| Parties | MATHEWS CADILLAC, INC., Plaintiff and Appellant, v. PHOENIX OF HARTFORD INSURANCE COMPANY, Defendant and Respondent. Civ. 16634. |
Higgs, Fletcher & Mack and Joe N. Turner, San Diego, for plaintiff and appellant.
Post, Kirby, Wideman & Noonan and Gregory A. Post, San Diego, for defendant and respondent.
Mathews Cadillac, Inc. (Mathews) appeals from an order and judgment of dismissal made pursuant to Code of Civil Procedure section 581a 1 for failure to have its judgment entered within three years after service of summons on defendant where no answer had been filed. On March 16, 1971, Mathews filed its complaint for breach of contract, breach of warranty, negligence and property damage naming seven defendants including, inter alia, V.P. Construction, Inc. (V.P.) and Larry S. Carroll, as administrator with will annexed of the estate of Vincent R. Provenzano, deceased (Carroll).
The action was based upon alleged defects in the construction of an apartment house project causing property damage. V.P. was personally served with summons and complaint on April 19, 1971; Carroll was served the following day. V.P. did not answer and a default was entered on this failure (June 24, 1971).
Meanwhile, V.P. on March 1, 1971, filed a petition in the United States District Court, San Diego, seeking to be adjudicated bankrupt. That court adjudicated V.P. bankrupt and on June 30, 1971, entered its order of discharge.
On December 1, 1971, Mathews filed its first amended complaint setting forth the same grounds against the same named defendants but adding as additional defendant Phoenix of Hartford Insurance Company (Phoenix). Phoenix's legal responsibility was charged as liability insurer of V.P. and (decedent) Provenzano on the apartment construction project; Phoenix was not otherwise involved in the dispute between Mathews and the other defendants.
On March 8, 1976, a default was entered against Carroll. No judgment has ever been entered against either V.P. or Carroll. Neither V.P. nor Carroll have ever filed an answer.
On February 23, 1977, more than five years after V.P. and Carroll had been served with process, Phoenix filed its motion to dismiss based upon Mathews' failure to have judgment entered within three years after service of process as required by section 581a, subdivision (c). 2 The trial court granted the motion, entered its order and judgment of dismissal as against V.P., Carroll and Phoenix, whereupon Mathews appealed.
Mathews contends the trial court erred in dismissing its complaint against V.P. in that V.P. was not "amenable to the process" of the superior court. 3 Mathews argues it was restrained from continuing its lawsuit against V.P. by order of the bankruptcy court discharging V.P. of its debts. The difficulty with Mathews' position is that it is based on a misconstruction of applicable federal law. Section 14 of the Bankruptcy Act (11 U.S.C., § 32) was amended in 1970 to add subdivision (f) which provides:
The primary reason for the amendment was to render needless the assertion by the bankrupt in state court of the affirmative defense of the discharge. (1A Collier on Bankruptcy, § 14.69, p. 1453.) The statute in so many words requires the order of discharge to contain the injunction banning creditors from enforcing discharged debts "as personal liabilities of the bankrupt." any judgment obtained in violation of the order is "null and void as a determination of the Personal liability of the bankrupt." (Bankruptcy Act, § 14, subd. (f)(1) (11 U.S.C., § 32, subd. (f)(1)); italics added.)
Section 14, subdivision (f), of the Bankruptcy Act, however, does not prohibit a creditor from pursuing an action against the discharged bankrupt for purposes of imposing liability on another person, such as a guarantor or indemnitor. 4 Concerning section 14, subdivision (f), Collier on Bankruptcy states:
(1A Collier on Bankruptcy, § 14.69, pp. 1454-1455; italics added.)
That section 14, subdivision (f) of the Bankruptcy Act imposes only a limited restraint on actions against discharged debtors is supported by the language of section 16 of the Bankruptcy Act (11 U.S.C., § 34) which provides: "The liability of a person who is a co-debtor with, or guarantor or in any manner a surety for, a bankrupt shall not be altered by the discharge of such bankrupt."
Where the terms of the indemnity contract, or law of the state, require a judgment against the bankrupt (indemnitee) before direct action against the insurer, no liability accrues as an enforceable claim against the insurer until recovery of a final judgment against the bankrupt. (Cal.Insurance Code, § 11580, subd. (b)(2); Levy v. Superior Court, 74 Cal.App. 171, 239 P. 1100; Jennings v. Ward, 114 Cal.App. 536, 300 P. 129; Security B. & L. Assn. v. Maryland C. Co., 6 Cal.App.2d 77, 44 P.2d 370.)
In such circumstances, section 14, subdivision (f), and section 16 of the Bankruptcy Act permit a plaintiff to pursue his actions against the discharged bankrupt to judgment but not to execution thereon.
"(W)here a judgment against the debtor discharged in bankruptcy is a condition precedent to liability . . . a judgment may be entered against the discharged debtor with a perpetual stay of execution." (1A Collier on Bankruptcy, § 16.06, p. 1536.)
Thus, Mathews was free to pursue its action against defendant V.P. to judgment, but the state court was required then to enter a perpetual stay of execution in favor of the discharged bankrupt. When this condition precedent was fulfilled, Mathews could bring a direct action on that judgment against the insurer of the bankrupt. This procedure is long-established in California law. In Hartnett v. Wilson, 31 Cal.App. 678, 161 P. 281, the court ordered a perpetual stay of execution against a bankrupt, thus permitting the plaintiff to recover against defendants' surety.
The United States Supreme Court in Hill v. Harding, 130 U.S. 699, 9 S.Ct. 725, 32 L.Ed. 1083, held the predecessor statute 5 to the Bankruptcy Act did not prevent a state court from rendering judgment against a discharged bankrupt with a perpetual stay of execution, thus enabling the plaintiff to proceed against a surety. This principle of law remains the same under the existing Bankruptcy Act.
No California case is found interpreting the 1970 amendment; however, in Kutza v. Parker (1962) 115 Ohio App. 313, 316, 185 N.E.2d 53, 55, the court interpreted section 14, subdivision (f), of the Bankruptcy Act in light of an Ohio insurance statute similar to California Insurance Code section 11580, subdivision (b), and held:
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