After consummation of a joint chapter 11 plan, neither the bankruptcy court nor the district court had subject matter jurisdiction to sustain a lawsuit by the debtors for abuse of process lodged under Section 105(a), according to District Judge John W. Holcomb of Santa Ana, Calif.
The debtors confirmed a chapter 11 plan in December 2020. Before confirmation, the debtors filed suit in bankruptcy court against several creditors, alleging:
[T]he Defendants have waged a vexatious campaign to file as many pleadings as possible in a “scorched earth” attempt to force the Debtors in the three cases to capitulate to the Defendants by surrendering their business, commercial property, and [the debtor’s] residence to them. All of the pleadings . . . that were filed by the Defendants in this case and in the related cases, were improper and in bad faith. This is apparent by the fact that the Court dismissed, reduced, or reversed virtually every pleading filed by the Defendants.
There being a demand for a jury trial and no consent to final adjudication in bankruptcy court, the adversary proceeding was withdrawn to district court, where Judge Holcomb dismissed the suit for lack of subject matter jurisdiction in an opinion on June 29.
Judge Holcomb explained that the debtors were seeking more than $400,000 in sanctions for the defendants’ vexatious litigation. The complaint stated that the claim arose under Section 105(a), the All Writs Act. It gives the court power to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”
“In reality,” Judge Holcomb said, the debtors were asserting a “private right of action for the recovery of costs and fees as a sanction for abuse of process [based on the] Defendants’ alleged bad faith and misconduct during the underlying bankruptcy cases.”
“Although § 105(a) unmistakably permits bankruptcy courts to police the proceedings before it,” Judge Holcomb framed the question as whether Section 105(a) “creates a private right of action for an aggrieved party in a bankruptcy case to sue for damages for alleged abuse of process.”
“Generally,” Judge Holcomb said, a private right of action must be created by Congress. The Ninth Circuit, he said, “has instructed that § 105(a) does not provide parties with a general private right of action to sue for damages.” See In re Dyer, 322 F.3d 1178, 1190 (9th Cir. 2003).
Judge Holcomb explained that the appeals court in Dyer went on to say that the bankruptcy trustee was “limited to the civil contempt remedy provided by § 105(a).” Id. In the case before him, the debtors had disclaimed any claims for civil contempt.
In those circumstances, Judge Holcomb said that “[c]ourts within the Ninth Circuit have repeatedly held that, without a private right of action, a plaintiff cannot use the sanctions authority of § 105(a) to support a claim for damages.” Likewise, he said that “courts outside of this circuit have explicitly held that § 105(a), in and of itself, cannot support a claim for damages.”
Next, Judge Holcomb cited the Supreme Court for holding that there is no federal common law tort for abuse of process without a statutory basis. See Wheeldin v. Wheeler, 373 U.S. 647, 651-52 (1963). Thus, he said, any claim for abuse of process would arise under California law. Consequently, the debtors could not rely on Section 105(a) to justify federal subject matter jurisdiction.
Similarly, the debtors could not invoke “related to” jurisdiction to provide subject matter jurisdiction for a state-law claim.
The confirmed plan did not retain jurisdiction, and the suit could have no “conceivable effect” on the estate. There being no “related to” jurisdiction, Judge Holcomb held that the “action properly belongs in state court.”
Judge Holcomb dismissed the suit for lack of subject matter jurisdiction.
After consummation of a joint chapter 11 plan, neither the bankruptcy court nor the district court had subject matter jurisdiction to sustain a lawsuit by the debtors for abuse of process lodged under Section 105(a), according to District Judge John W. Holcomb of Santa Ana, Calif.
The debtors confirmed a chapter 11 plan in December 2020. Before confirmation, the debtors filed suit in bankruptcy court against several creditors, alleging:
[T]he Defendants have waged a vexatious campaign to file as many pleadings as possible in a “scorched earth” attempt to force the Debtors in the three cases to capitulate to the Defendants by surrendering their business, commercial property, and [the debtor’s] residence to them. All of the pleadings . . . that were filed by the Defendants in this case and in the related cases, were improper and in bad faith. This is apparent by the fact that the Court dismissed, reduced, or reversed virtually every pleading filed by the Defendants.
There being a demand for a jury trial and no consent to final adjudication in bankruptcy court, the adversary proceeding was withdrawn to district court, where Judge Holcomb dismissed the suit for lack of subject matter jurisdiction in an opinion on June 29.