Harrelson v. DSSC, Inc.

MARIE SUE HARRELSON, Plaintiff, v. DSSC, INC., and VANN A. SPRAY, Defendants.

CASE NO. 3:14-MC-3675-WKW [WO]

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF ALABAMA EASTERN DIVISION

March 10, 2015

MEMORANDUM OPINION AND ORDER

The United States District Court for the Middle District of Alabama has in place a standing order entered April 25, 1985, that refers all bankruptcy cases and related proceedings to the United States Bankruptcy Court for the Middle District of Alabama. Unless the district court withdraws the reference of jurisdiction to the bankruptcy court, jurisdiction over bankruptcy cases and related proceedings resides with the bankruptcy court. Through two motions, Defendants DSSC, Inc., and Vann A Spray have moved this court pursuant to 28 U.S.C. § 157(d) to withdraw the referred adversary proceeding filed by Plaintiff Marie Sue Harrelson. (Docs. # 1, 8; see also Doc. # 3.) Ms. Harrelson opposes their motions. After careful consideration of the arguments of counsel, the relevant law, and the record as a whole, the court finds that the motions to withdraw the reference are due to be denied.

I. BACKGROUND

In February 2014, Ms. Harrelson filed a voluntary Chapter 13 bankruptcy petition in the United States Bankruptcy Court for the Middle District of Alabama. See In re Harrelson, No. 14-80169 (Bankr. M.D. Ala. Feb. 13, 2014). On July 16, 2014, she brought an adversary proceeding against Global Client Solutions, LLC ("Global"), DSSC, Inc., and Vann A. Spray in connection with contractual services for the elimination of her consumer credit card debt. See Harrelson v. Global Client Solutions, LLC, No. 14-80169 (Bankr. M.D. Ala. July 16, 2014). According to the allegations in the adversary Complaint, Global is a limited liability company providing account management services for debt settlement companies and their clients; DSSC, Inc., is a debt settlement corporation; and Mr. Spray is an Alabama attorney offering debt settlement services. Ms. Harrelson retained Mr. Spray's law firm to settle her debts on four credit card accounts, and the law firm used the business address of DSSC.¹ Pursuant to her agreements with Mr. Spray's law firm and Global, Ms. Harrelson permitted automatic withdrawals of monthly fees from her bank account, which Global administered. Ms. Harrelson alleges that Defendants did not provide any debt resolution services in exchange for her payments totaling around $3,800 and that the payment processing arrangement was illegal.

Ms. Harrelson has amended her adversary Complaint, but it is helpful for the discussion to begin with the claims in the original adversary Complaint. Three of the four claims in the adversary Complaint arose under bankruptcy law: (1) a claim seeking to avoid allegedly fraudulent transfers under 11 U.S.C. § 548; (2) a claim for turnover of property of the estate under 11 U.S.C. § 542; and (3) a claim for violations of 11 U.S.C. §§ 526-28 of the Bankruptcy Code, which impose restrictions and requirements on debt relief agencies ("Debt Relief Agency Provisions").² The adversary Complaint's fourth claim alleged violations of the Credit Repair Organizations Act ("CROA"), 15 U.S.C. §§ 1679, et seq. The Complaint also sought nationwide class certification of the claims under the CROA and the Debt Relief Agency Provisions pursuant to Federal Rule of Bankruptcy Procedure 7023.

On September 9, 2014, Global responded to the Complaint in the adversary proceeding with a motion to withdraw the reference to the bankruptcy court pursuant to § 157(d). Global emphasized that Ms. Harrelson had signed arbitration agreements with class-action waivers - one with the law firm of Mr. Spray in connection with her retention of that firm to negotiate settlements of her unsecured debts and one with Global in connection with a bank account established for thefirm's use in representing Ms. Harrelson. As grounds for mandatory withdrawal of the reference, Global argued that the arbitration agreements injected into the adversary proceeding issues under the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16.³ Global further contended that withdrawal of the reference was mandatory because the adversary proceeding included a non-bankruptcy law claim under the CROA.

On September 20, 2014, after Global filed its motion to withdraw the reference, Ms. Harrelson amended her Complaint in the adversary proceeding to omit the CROA claim. Global replied that the adversary proceeding still required substantial and material consideration of the FAA and for that reason alone, withdrawal of the reference remained mandatory under § 157(d).

On September 22, 2014, Defendants DSSC and Mr. Spray joined Global's motion to withdraw the reference, contending that, "because this is a putative class action, and for the additional reasons stated in Global's Motion to Withdraw the Reference, the district court, rather than the bankruptcy court, should preside over these matters." (DSSC & Spray's Joinder, at 1-2 (Doc. # 3).) DSSC and Mr.Spray also expressed their intention to file a motion to compel arbitration after disposition of the motion to withdraw the reference.⁴

After briefing closed on the motion to withdraw the reference, Ms. Harrelson settled her dispute with Global, and Global moved to withdraw its motion to withdraw the reference. That motion has been granted in a separate Order. On December 9, 2014, DSSC and Mr. Spray then filed a Renewed and Restated Motion to Withdraw Reference confirming their joinder in Global's motion to withdraw the reference and asserting additional arguments in support of the motion.⁵ (DSSC & Spray's Renewed Mot. (Doc. # 8).)

II. DISCUSSION

Congress vests district courts with "original and exclusive jurisdiction of all cases under title 11" of the United States Bankruptcy Code. 28 U.S.C. § 1334(a). However, Congress allows district courts to refer "any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11" to their bankruptcy judges. 28 U.S.C. § 157(a). Pursuant to § 157(a), the Middle District of Alabama has entered a General Order of Reference that automatically refers all cases arising under or related to title 11 to the district'sbankruptcy court. See General Order of Reference: Bankruptcy Matters (M.D. Ala. Apr. 25, 1985). While the reference to the bankruptcy court is automatic, there is a statutory provision that mandates withdrawal in some circumstances and permits it in others. See 28 U.S.C. § 157(d).

A motion for withdrawal of the reference "of a case or proceeding shall be heard by a district judge." Fed. R. Bankr. P. 5011. The movant bears the burden of demonstrating that § 157(d)'s mandatory-withdrawal provision applies. See In re Vicars Ins. Agency, Inc., 96 F.3d 949, 953 (7th Cir. 1996); Abrahams v. Phil-Con Servs., LLC, No. 10-326, 2010 WL 4875581, at *3 (S.D. Ala. Nov. 23, 2010). If the movant meets its burden, the district court presides over the adversary proceeding instead of the bankruptcy court. See generally In re King Mem'l Hosp., 767 F.2d 1508, 1510 (11th Cir. 1985) (A ruling on a motion to withdraw the reference "essentially only determine[s] the forum in which final decisions will be reached.").

Section 157(d)'s mandatory provision is at issue. Withdrawal is mandatory if, upon a party's "timely motion," the district court "determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce." § 157(d).

Two opposing standards have emerged from case law for analyzing whether a proceeding involves "consideration" of both title 11 and non-federal bankruptcy law under § 157(d)'s mandatory provision. The first standard embraces a literal reading of § 157(d). It requires withdrawal "if resolution of the dispute requires any consideration of a non-title 11 federal law." Walker v. LVNV Funding, LLC, No. 5:14mc2057, 2014 WL 7409525, at *1 (N.D. Ala. Dec. 31, 2014) (emphasis added) (noting but ultimately rejecting this standard). This standard relies upon "the absence of any qualifying or narrowing term associated with the term 'consideration.'" Rodriguez v. Countrywide Home Loans, Inc., 421 B.R. 341, 348 (S.D. Tex. 2009). In other words, mandatory withdrawal prevails "regardless of the substantiality of the legal questions presented." Hvide v. Kimbrell (In re Hvide Marine, Inc.), 248 B.R. 841, 844 (M.D. Fla. 2000) (citation and internal quotation marks omitted).

The second standard requires withdrawal of the reference "'only if the court can make an affirmative determination that resolution of the claims will require substantial and material consideration of those non-Code statutes' which have more than a de minimis impact on interstate commerce." DePaola v. Price (In re Price), 2:06mc3317, 2007 WL 2332536, at *2 (M.D. Ala. Aug. 13, 2007) (quoting TPI Int'l Airways, Inc. v. Fed. Aviation Admin. (In re TPI Int'l Airways), 222 B.R. 663, 667 (S.D. Ga. 1998)). Courts that employ the substantial and materialstandard "have expressed concern that parties could undermine Congress's intent to give district courts the discretion to refer Title 11 cases to bankruptcy courts by alleging insubstantial claims involving non-bankruptcy code federal law." Id.; see also In re Vicars Ins. Agency, 96 F.3d at 953 (observing that a literal reading of § 157(d), "which makes withdrawal virtually automatic, reads out of the statute both district court discretion and any 'consideration' whatsoever").

The Eleventh Circuit has not had an occasion to weigh in on the appropriate standard under § 157(d), but the majority of district courts confronted with the issue have adopted the substantial and material standard. See Slaughter v. LVNV Funding, LLC, No. 2:14mc2050, 2015 WL 627954, at *1 (N.D. Ala. Feb. 12, 2015) (observing that under § 157(d)'s mandatory withdrawal provision, "[m]ost courts . . . ,...