A bankruptcy court has subject matter jurisdiction to entertain a nationwide class action against a claim purchaser, according to Bankruptcy Judge Jeff Bohm of Houston.
A creditor filed a proof of claim in a chapter 13 case. Challenged about the allowability of the claim, the creditor withdrew the claim.
Several months later, the debtor initiated a class action against the creditor in bankruptcy court, seeking actual, statutory and punitive damages, along with equitable relief, for alleged abuse of the bankruptcy system and willful and intentional disregard of the requirements for filing legitimate claims in chapter 13 cases throughout the country.
The creditor responded with a motion to dismiss under Rules 12(b)(1) and (b)(6). Judge Bohm denied the motion in a May 19 opinion finding that the bankruptcy court can exercise jurisdiction over a nationwide class action. The opinion does not deal with the question of whether the reference to the bankruptcy court could or must be withdrawn.
In Midland Funding LLC v. Johnson, 16-348, 2017 BL 161314, 85 U.S.L.W. 4239 (Sup. Ct. May 15, 2017), the Supreme Court held that filing a time-barred claim does not violate the federal Fair Debt Collection Practices Act. The class suit in Judge Bohm’s court is apparently an effort to use a different theory to halt a business practice that Midland Funding arguably might permit.
In response to the challenge to the bankruptcy court’s subject matter jurisdiction, Judge Bohm cited Fifth Circuit authority for the proposition that “there is no question that bankruptcy courts are permitted to handle class actions in adversary proceedings.” Noting that Bankruptcy Rule 7023 incorporates Federal Rule 23, he again cited the appeals court for saying that a prohibition against class suits in bankruptcy court would “virtually read” Rule 7023 out of the rules.
Although conceding that bankruptcy courts can entertain class suits, the creditor argued there is no jurisdiction over a nationwide class.
Rejecting the argument, Judge Bohm first said that district courts have jurisdiction over nationwide classes. Because the bankruptcy court is a “unit” of the district court with “authority to adjudicate all matters that fall within the district court’s bankruptcy jurisdiction,” he concluded that the bankruptcy court “may exercise jurisdiction over a nationwide class of debtors.”
Judge Bohm then addressed whether there was arising in, arising under, or related to jurisdiction. He found arising under jurisdiction because the debtor was alleging a violation of Bankruptcy Rule 3001. There also was arising in jurisdiction, because the claims “could not possibly exist outside of bankruptcy.”
Although Judge Bohm denied the motion to dismiss for lack of subject matter jurisdiction, he called for an evidentiary hearing before deciding whether the plaintiff was an adequate class representative under Rule 23(a)(4). The creditor is alleging that the debtor is barred from being a class representative given conflicting responsibilities to her class and to her own creditors.
Judge Bohm also called for a hearing to decide under Rule 23(b)(3) whether individual or common issues predominate.