Case Name: Xuehua Wang, et al. v. Art of Reflexology Milpitas, LLC, et al.
Case No.: 2015-1-CV-283659

This is a class action alleging that defendants misclassified employees as independent contractors and committed other wage and hour violations. Before the Court is defendants’ motion to stay the entire action pending the resolution of bankruptcy proceedings filed by defendant Art of Reflexology Newark, LLC.

Defendants’ motion followed Newark’s bankruptcy filing on July 30, 2019, a few days before the continued hearing on plaintiffs’ motion for discovery sanctions—which remains pending. Within three hours of the bankruptcy filing, defendants filed a notice of stay in this action, indicating that the case was stayed with regard to all parties as a result of the automatic stay triggered by Newark’s bankruptcy. The Court discussed the bankruptcy with the parties at the August 2nd hearing on plaintiffs’ motion for sanctions. As stated in its subsequent order (filed on August 12),

Defendants take the position that this action must be stayed as to all defendants as a result of Newark’s bankruptcy. While the Court has stayed the action as to Newark, it takes no position on the impact of the stay as to the other defendants. Still, it will take no further action on the case, including with regard to the pending motion for sanctions, until it decides a motion to stay to be filed by defendants by August 16, 2019.

The motion for stay has now come on for hearing. In their moving papers, defendants essentially abandon their position that the automatic stay triggered by Newark’s bankruptcy applies to all of the defendants. This may be because their position was unsupported:

Significantly, “the automatic stay of judicial proceedings against a debtor in bankruptcy does not apply to nondebtor codefendants.” (Cross v. Cooper (2011) 197 Cal.App.4th 357, 365, fn. 2, 127 Cal.Rptr.3d 903 (Cross); accord, Danko v. O’Reilly (2014) 232 Cal.App.4th 732, 748, 181 Cal.Rptr.3d 304 (Danko) [“ ‘automatic stay does not … apply to nondebtor entities such as … codefendants’ ”].) As a general rule, therefore, because “the automatic stay protects only the debtor,” the “[b]ankruptcy of one defendant in a multidefendant case does not stay the case as to the remaining defendants.” (March et al., Cal. Practice Guide: Bankruptcy (The Rutter Group 2016) ¶ 8:100, p. 8(I)-8, ¶ 8:125, p. 8(I)-11 [citing federal authorities].)

(Higgins v. Superior Court (Cabandong) (2017) 15 Cal.App.5th 973, 979-980.) The only case defendants cite in support of their previous position that the automatic stay applies to Newark’s codefendants is Matter of James Wilson Associates (7th Cir. 1992) 965 F.2d 160, 170, which states in dicta that there “may” be an exception to the above-stated rule where the debtor is an indispensable party to the litigation.

Rather than pursuing this potential exception to the rule that the automatic stay applies to the debtor alone, defendants ask the Court to enter a discretionary “stay” pursuant to Code of Civil Procedure section 389. That section provides that where a necessary party cannot be joined, the trial court, considering a number of factors, “shall determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed without prejudice, the absent person being thus regarded as indispensable.” (Code Civ. Proc., § 389, subd. (b), italics added; see Dreamweaver Andalusians, LLC v. Prudential Ins. Co. of America (2015) 234 Cal.App.4th 1168, 1176-1177 [trial court has “substantial discretion” in deciding whether to dismiss an action under this statute].) Defendants contend that they are alleged to have been joint employers of plaintiffs and the class, and are consequently each necessary and indispensable parties to the action. They cite no authority in support of this position, stating that the issue “would appear to be a case of first impression.” As urged by plaintiffs, defendants’ position is entirely without merit. The law is clear that joint tortfeasors are not necessary parties (see Countrywide Home Loans, Inc. v. Superior Court (HP Lemona II) (1999) 69 Cal.App.4th 785, 796-798), and there is no basis to distinguish joint employers in this regard, as they are each individually liable for any violations they committed (see Noe v. Superior Court (Levy Premium Foodservice Limited Partnership) (2015) 237 Cal.App.4th 316, 333-334). Moreover, here, the equities clearly do not favor dismissing the action, which would risk leaving the plaintiffs without a remedy.

In sum, defendants’ motion pursuant to Code of Civil Procedure section 389 is without merit. Further, this motion was not authorized by the Court’s August 12th order, which directed defendants to file a motion supporting their request that the Court stay the entire case pursuant to the mandatory automatic stay triggered by Newark’s bankruptcy: section 389 pertains to the discretionary dismissal of an action for failure to join indispensable parties, not to a mandatory stay. The motion is properly denied for both of these reasons, and these circumstances raise concerns regarding whether defendants acted reasonably and in good faith with regard to their request for a stay.

Moreover, the Court has even deeper concerns with defendants’ conduct in light of the recent closing of Newark’s bankruptcy case, brought to the Court’s attention through a September 12th filing by plaintiffs. Newark’s bankruptcy constituted the entire justification for defendants’ motion, and its resolution provides another, independent ground for denial of the motion to stay. While an order closing the bankruptcy matter was entered on September 6, defendants left their motion to stay on calendar and did not notify the Court or plaintiffs of this critical development over the course of two weeks. This raises further questions regarding defendants’ intent in moving for a stay.

Given these circumstances, defendants’ counsel shall personally appear at the hearing on this matter to explain the outcome of Newark’s bankruptcy case (including the grounds on which it was closed and whether it resulted in a discharge), to address its impact on the stay of proceedings as to Newark, and to address why defendants did not notify plaintiffs or the Court of this development. Pursuant to the Court’s August 12th order, dates for the completion of the depositions of defendants Lam and Lee and a date for the continued hearing on plaintiffs’ motion for sanctions will also be set at the hearing on September 20. Defendants’ counsel shall notify Lam and Lee that they must make themselves available to complete their depositions during the next few weeks, and counsel shall be prepared to provide plaintiffs with their available dates at the hearing on September 20.

Defendants’ motion for a stay is DENIED.

The Court will prepare the order.

UPDATED Tentative Ruling issued at 1:30pm on September 19, 2019:

The Court has received and reviewed defendants’ Notice of Termination of Bankruptcy Stay and Request to Take Motion to Stay Off Calendar, filed on September 18, 2019 at 5:14 P.M.

Notwithstanding this filing, defendants’ counsel shall personally appear at the hearing on this matter to explain the outcome of Newark’s bankruptcy case (including the grounds on which it was closed and whether it resulted in a discharge), to address its impact on the stay of proceedings as to Newark, and to address why defendants did not notify plaintiffs or the Court of this development. Pursuant to the Court’s August 12th order, dates for the completion of the depositions of defendants Lam and Lee and a date for the continued hearing on plaintiffs’ motion for sanctions will also be set at the hearing on September 20. Defendants’ counsel shall notify Lam and Lee that they must make themselves available to complete their depositions during the next few weeks, and counsel shall be prepared to provide plaintiffs with their available dates at the hearing on September 20.