Jones v. Lexington Health Servs. Dist., Inc. (In re)

618 B.R. 757

IN RE, Jeremiah F. JONES, Debtor.

Jeremiah F. Jones, Teri Denice Mayers, and Kimberly Ann Williams, individually and on behalf of all others similar situated, Plaintiffs,

v.Lexington Health Services District, Inc. d/b/a Medical Center, Defendant.

C/A No. 18-06304-DD, 14-00864-DD, 17-02620-DD

Adv. Pro. No. 20-80002-DD

United States Bankruptcy Court, D. South Carolina.

Signed July 8, 2020

David A. Maxfield, Trotter & Maxfield, Columbia, SC, Daniel A. Stone, Stone Law Firm, Irmo, SC, for Debtor.

ORDER DENYING MOTION TO DISMISS ADVERSARY PROCEEDING

David R. Duncan, US Bankruptcy Judge

This matter is before the Court on a motion to dismiss the above-referenced adversary proceeding, filed by the defendant Lexington Health Services District, Inc. d/b/a Lexington Medical Center on March 4, 2020. The plaintiffs filed an objection to the motion on April 1, 2020, and the defendant filed a reply in support of the motion on April 6, 2020. The Court held a hearing on June 4, 2020. At the conclusion of the hearing, the Court took the matter under advisement. For the reasons set forth below, the Court now denies the motion.¹

BACKGROUND

This adversary proceeding was commenced on January 10, 2020. All three plaintiffs were debtors in chapter 7 cases who listed debts to the defendant in their respective bankruptcy cases. The adversary proceeding was commenced as a putative class action. The complaint asserts that the defendant, using, or threatening to use, the state's Setoff Debt Collection Program, collected the plaintiffs' tax refunds to pay medical debts incurred by the plaintiffs despite notice of the bankruptcy filings, in violation of either the automatic stay or the discharge injunction. The complaint asserts causes of action for violation of the discharge injunction, violation of the automatic stay, and unjust enrichment, each on behalf of a different class.

Each plaintiffs' situation is different, as recited in the complaint. The facts recited here are taken as true only for the purposes of this order. Mr. Jones filed his bankruptcy case on December 12, 2018 and listed a debt to the defendant. Notice of his bankruptcy case was sent to the defendant. On January 25, 2019, Mr. Jones received notice that a portion of his tax refund had been seized by the defendant. The complaint asserts that the seized funds have been partially refunded. Mr. Jones seeks to represent a class of debtors during whose bankruptcy cases the automatic stay was violated by the defendant's seizure of tax refunds through the Setoff Debt Collection Program.

Ms. Mayers filed her bankruptcy case on February 19, 2014. In her bankruptcy schedules she listed three debts to the defendant. Ms. Mayers received her chapter 7 discharge on June 2, 2014, discharging her personal liability on the debts to the defendant. The defendant received notice both of Ms. Mayer's bankruptcy case and of her chapter 7 discharge. Then, in spring 2019, the defendant seized a portion of Ms. Mayer's tax refund. Ms. Mayers seeks to represent a class of debtors whose discharged debt was collected by the defendant through the Setoff Debt Collection Program.

Ms. Williams filed her bankruptcy case on May 25, 2017. She listed a debt to the defendant in her bankruptcy schedules. Ms. Williams received her discharge on August 24, 2017, discharging her from personal liability on the debt to the defendant. The defendant received notice both of Ms. Williams' bankruptcy case and of her chapter 7 discharge. In April 2018, the defendant began sending Ms. Williams notices seeking to collect the debt. Ms. Williams ultimately paid the defendant over $300.00, which it has not returned. Ms. Williams seeks to represent a class of debtors whose discharged debt was collected by the defendant using threats to invoke the Setoff Debt Collection Program.

ARGUMENTS OF THE PARTIES

The defendant asserts that it is a political subdivision and that pursuant to S.C. Code § 12-60-80(C), made applicable to this action by Federal Rule of Civil Procedure 17, it lacks the capacity to be named as a party in a class action lawsuit. The defendant additionally asserts that the plaintiffs' claims against it are barred by sovereign immunity. Finally, the defendant argues that the plaintiffs' claims must be dismissed because the plaintiffs have not exhausted their administrative remedies, as required by the Setoff Debt Collection Act.

The plaintiffs assert that Rule 23 controls and that state law cannot supplant this federal rule. The plaintiffs further respond that under Rule 17 and South Carolina state law, the defendant has the capacity to be sued, because "capacity" is "a binary determination of whether a given entity is subject to suit." The plaintiffs also argue that the defendant does not have sovereign immunity because under United States Supreme Court precedent states have waived sovereign immunity with respect to bankruptcy matters. Finally, the plaintiffs argue that they are not required to exhaust their administrative remedies before bringing this action because their causes of action are under the Bankruptcy Code, not under state law.

LEGAL STANDARD

The defendant asserts that its motion is made pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Federal Rule of Bankruptcy Procedure 7012(b) provides that Fed. R. Civ. P. 12(b) applies in adversary proceedings. Fed. R. Civ. P. 12(b) provides, in relevant part:

(b) How to Present Defenses. Every defense to a claim for relief in any pleading must be asserted in the responsive pleading if one is required. But a party may assert the following defenses by motion:

(1) lack of subject-matter jurisdiction;

(2) lack of personal jurisdiction;

(3) improper venue;

(4) insufficient process;

(5) insufficient service of process;

(6) failure to state a claim upon which relief can be granted; and

(7) failure to join a party under Rule 19.

Defenses of lack of capacity, sovereign immunity, and failure to exhaust administrative remedies are typically treated under Rule 12(b)(1) or 12(b)(6). See Alley v. Yadkin Cty. Sheriff Dep't, 2017 WL 5635946, at *1 (M.D.N.C. Jan. 27, 2017) ("The defense of lack of capacity to be sued is properly brought before the Court on a motion to dismiss under Rule 12(b)(6) for failure to state a claim."); Schulze v. Ratley , 2012 WL 3964984, at *3 (D.S.C. Sept. 11, 2012) ("[P]laintiff Schulze's claims against the defendants in their official capacities are dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure.") (emphasis original); Temples v. U.S. Postal Serv. , 2012 WL 1952655, at *2 (D.S.C. May 8, 2012) (quoting Laber v. Harvey , 438 F.3d 404, 434 (4th Cir. 2006) ) ("There is some uncertainty as to whether a failure to exhaust administrative remedies is properly brought in a Rule 12(b)(1) motion, as a jurisdictional defect, or in a Rule 12(b)(6) motion for failure to state a claim. In the context of administrative remedies, ‘the line between Rule 12(b)(1) and a Rule 12(b)(6) motions [sic] has become "indefinable." ’ "). The Fourth Circuit has acknowledged that the line between a Rule 12(b)(1) and 12(b)(6) motion is blurred, but that "[a] 12(b)(1) motion addresses whether [a party] has the right to be in the district court at all and whether the court has the power to hear and dispose of his claim, and a 12(b)(6) motion addresses whether [a plaintiff] has stated a cognizable claim, a challenge to the sufficiency of the complaint." Holloway v. Pagan River Dockside Seafood, Inc. , 669 F.3d 448, 452 (4th Cir. 2012).

With respect to Rule 12(b)(1), challenges to jurisdiction can be raised in two ways: facial attacks and factual attacks. Bolt v. United States , 2015 WL 7568241, at *1 (D.S.C. Oct. 16, 2015) (citing Thigpen v. United States , 800 F.2d 393, 401 n.15 (4th Cir. 1986) ). "A facial attack questions the sufficiency of the complaint. In this context, the court must accept the allegations in the complaint ‘as true, and materials outside the pleadings are not considered.’ " Id. (quoting Thigpen , 800 F.2d at 401 n.15 ). A factual attack "challenges the factual allegations in the complaint upon which subject-matter jurisdiction is based." Id. (citing Thigpen , 800 F.2d at 401 n.15 ). When considering a factual attack under Rule 12(b)(1), the court should consider evidence outside the pleadings, without converting the motion to one for summary judgment. Id. (citations omitted). "[A] dismissal should only be granted when ‘the material jurisdictional facts are not in dispute and the moving party is entitled to prevail as a matter of law.’ " Id. (quoting Richmond, Fredericksburg & Potomac R.R. Co. v. United States , 945 F.2d 765, 768 (4th Cir. 1991) ).

Under Rule 12(b)(6), to survive a motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). A complaint meets the plausibility standard when it "articulate[s] facts, when accepted as true, that ‘show’ that the plaintiff has stated a claim entitling him to relief, i.e., the ‘plausibility of "entitlement to relief." ’ " Francis v. Giacomelli , 588 F.3d 186, 193 (4th Cir. 2009) (quoting Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 ). The pleader must provide more than mere "labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly , 550 U.S. at 555, 127 S.Ct. 1955 (citations omitted). In reviewing claims for failure to state a claim, a court must construe the allegations in the light most favorable to the plaintiff. Haynsworth Sinkler Boyd, P.A. v. Holmes (In re Holmes) , 610 B.R. 541, 546 (Bankr. D.S.C. 2020). Under both a Rule 12(b)(1) and Rule 12(b)(6) standard, the defendant's motion fails.

ANALYSIS

1. Lack of Capacity

The...