Harrelson v. Global Client Solutions, LLC et al

Filing 12

MEMORANDUM OPINION AND ORDER that their 1 motion and 8 amended motion to withdraw the reference of Plf Marie Sue Harrelson's adversary proceeding to the bankruptcy court are DENIED; DIRECTING the Clerk to close this case. Signed by Chief Judge William Keith Watkins on 3/10/2015. (furn: Bankruptcy)(Attachments: # 1 Civil Appeals Checklist) (wcl, )

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF ALABAMA
EASTERN DIVISION
MARIE SUE HARRELSON,
Plaintiff,
v.
DSSC, INC., and VANN A.
SPRAY,
Defendants.

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

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.
1

The specifics of the relationship between Mr. Spray and DSSC are not illuminated in
the pleadings.
2

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 the

2

The Debt Relief Agency Provisions are part of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005.
3

firm’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.

3

Global indicated that it intended to file a motion to compel arbitration after a ruling on
the motion to withdraw the reference, and for illustrative purposes, it submitted that motion as an
exhibit to its motion to withdraw the reference.
4

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’s
4

On October 23, 2014, the bankruptcy court entered an Order staying proceedings
pending this court’s determination on the motion to withdraw the reference.
5

The arguments in Global’s motion are now solely DSSC’s and Mr. Spray’s through
their adoption of the motion. In Part II, the court attributes Global’s arguments to DSSC and Mr.
Spray and refers to DSSC and Mr. Spray collectively as “Defendants.”
5

bankruptcy 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. PhilCon 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).

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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 material
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standard “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 . . . , including all district courts within the Eleventh Circuit that have
considered the issue,” have opted for the substantial and material standard
(collecting cases)).
This court aligns with the district courts in the Eleventh Circuit and finds
that the sounder approach and the one more congruous with § 157(d)’s purposes is
the substantial and material standard. Adopting this approach, the court finds that
§ 157(d) requires mandatory withdrawal if the movant demonstrates that (1) the
adversary proceeding “involve[s] a substantial and material question of both title
11 and non-bankruptcy code federal law,” (2) the non-bankruptcy code federal law
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has “more than a de minimis effect on interstate commerce,” and (3) the motion for
mandatory withdrawal is timely. Astro Tel, Inc. v. Verizon Fla., LLC (In re Astro
Tel, Inc.), No. 8:11mc59, 2011 WL 4551571, at *2 (M.D. Fla. Sept. 30, 2011).
The second and third requirements are not in contention. As to the second
requirement, the FAA only applies to “[a] written provision in any maritime
transaction or a contract evidencing a transaction involving commerce.” 9 U.S.C.
§ 2; see also 9 U.S.C. § 1 (defining “commerce” to include interstate commerce);
Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 277–78 (1995) (broadly
interpreting the FAA’s interstate-commerce requirement to include all activities
that merely affect interstate commerce).

Because interstate commerce is

indispensable to the FAA, its effect on interstate commerce is more than de
minimis. As to the third requirement, Global filed its motion to withdraw the
reference, which DSSC and Mr. Spray joined, less than two months after the
adversary proceeding commenced and during the proceeding’s earliest stages. On
this record and absent any argument to the contrary, the motion is timely.
The only requirement in dispute is the first. Under the substantial and
material standard, “mere application of federal law does not make withdrawal
mandatory; withdrawal is only mandatory when ‘complicated, interpretive issues’
are involved, especially with matters of first impression or where there is a conflict
between bankruptcy and other laws.” Holmes v. Grubman, 315 F. Supp. 2d 1376,
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1379 (M.D. Ga. 2004) (quoting In re Hvide Marine, 248 B.R. at 844). In other
words, withdrawal is not mandatory “when only a simple application of wellsettled law is required.” Homeland Stores, Inc. v. Burrs (In re Homeland Stores,
Inc.), 204 B.R. 427, 430 (D. Del. 1997) (citation and internal quotation marks
omitted).

The Seventh Circuit similarly has concluded that to satisfy the

substantial and material standard of § 157(d), consideration of the non-title 11
issues “must require the interpretation, as opposed to mere application, of the nontitle 11” law or the “analysis of significant open and unresolved issues regarding
the non-title 11 law.” In re Vicars Ins. Agency, 96 F.3d at 953; see also Abrahams,
2010 WL 4875581, at *2 (citing with approval the standard enunciated in In re
Vicars Insurance Agency). Based upon the foregoing authorities, withdrawal of
the reference under § 157(d) is not mandatory if there is sufficient case law on the
particular issue of non-title 11 law such that the bankruptcy court need only apply
existing law, rather than resolve a new issue of law.
Under the substantial and material standard, § 157(d) does not limit
“consideration” of the non-title 11 issue to a cause of action. For example, an
affirmative defense will suffice so long as it invokes consideration of a non-title 11
issue that satisfies the substantial and material standard. See In re Hvide Marine,
248 B.R. at 844 (explaining that, under the substantiality test of § 157(d), the
affirmative defense “must demand more than a straightforward application of the
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law. It must rise to the level of requiring a decision on a matter of first impression
or of conflict between bankruptcy and other federal law.”).
Based upon the Amended Complaint, Ms. Harrelson’s adversary proceeding
no longer encompasses a federal-law claim outside of title 11. The claims rest
entirely on title 11 law. On the face of the Amended Complaint then, there is no
claim that necessitates substantial or material consideration of non-bankruptcy
federal law. Ms. Harrelson contends that the Amended Complaint’s removal of the
sole non-title 11 claim, i.e., the CROA claim, renders any consideration of nonbankruptcy laws tangential. Defendants counter that Ms. Harrelson’s “amendment
of convenience to drop the federal CROA claim did not change the call for
mandatory withdrawal.” (DSSC & Spray’s Renewed Mot., at 6.) They contend
that under § 157(d), the adversary proceeding still requires consideration of title 11
laws, as well as “other laws of the United States regulating . . . activities affecting
interstate commerce,” namely, the FAA. Defendants argue that a “central nonbankruptcy issue” concerns the enforceability of the arbitration agreement between
Ms. Harrelson and Mr. Spray’s law firm and that the FAA issues “exist
independent of [the] substantive causes of action.” (DSSC & Spray’s Renewed
Mot., at 6.) Defendants rely, therefore, on an affirmative defense, namely, the
existence of an arbitration agreement, for their argument that resolution of the
adversary proceeding will require substantial and material consideration of the
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FAA.

See generally Fed. R. Civ. P. 8(c)(1) (enumerating arbitration as an

affirmative defense); Fed. R. Bankr. P. 7008 (providing that Federal Rule of Civil
Procedure 8 “applies in adversary proceedings”). Moreover, Defendants argue that
“no bankruptcy court in the Eleventh Circuit . . . has analyzed or addressed
questions involving the FAA – and an express class action waiver in an arbitration
provision – in the context of a Bankruptcy Rule 7023 class action case, such as is
present in this case.”

(DSSC & Spray’s Renewed Mot., at 8 n.7 (emphasis

omitted).)
Based upon the parties’ arguments, the sole issue on the motion to withdraw
the reference is whether resolution of the claims in the adversary proceeding
requires substantial and material consideration of the FAA. Defendants are correct
that the court – be it the district court or the bankruptcy court – will have to resolve
whether the agreement entered into between Ms. Harrelson and Mr. Spray’s law
firm requires arbitration of Ms. Harrelson’s individual claims and whether the
class-action waiver provision in that agreement is enforceable. But under the
standard countenanced by the majority of courts and adopted here, Defendants
have not met their burden of showing that these disputed issues require substantial
and material consideration of the FAA within the meaning of § 157(d).
There is no serious argument that, as a general matter, there is wellestablished and full-bodied case law from the United States Supreme Court and
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Eleventh Circuit interpreting and applying the FAA. Additionally, in recent years,
the Supreme Court has issued decisions that shed light on the subject of the FAA
and class-action waivers. See Am. Express Co. v. Italian Colors Rest., 133 S. Ct.
2304 (2013) (providing guidance for analyzing whether a federal statute contains a
congressional command that overrides a class-action waiver in an arbitration
agreement); AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1750–51 (2011)
(holding that § 2 of the FFA preempts state-law rules that void consumer
arbitration agreements with class-action waivers); Stolt-Nielsen S.A. v. Animalfeeds
Int’l, 559 U.S. 662, 684 (2010) (holding “that a party may not be compelled under
the FAA to submit to class arbitration unless there is a contractual basis for
concluding that the party agreed to do so”). Defendants themselves agree that
“[t]he fact that Harrelson filed her Complaint in a bankruptcy court does not
change the fact” that the FAA governs the enforcement of the arbitration
agreement. (Mot. to Withdraw the Reference, Ex. 2 (Doc. # 1, at 43).)
Defendants point out, however, that the arbitration issues here arise in the
context of an adversary proceeding and that, therefore, an important threshold issue
exists, namely whether the enforcement of the arbitration agreement would create
an inherent conflict between the FAA and the bankruptcy code so as to trump the
FAA’s mandate for enforcement of arbitration agreements.

But again, as

Defendants themselves recognize (see Doc. # 1, at 43), the Eleventh Circuit has set
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forth the principles and steps that govern this analysis.

See Whiting-Turner

Contracting Co. v. Electric Mach. Enters., Inc. (In re Electric Mach. Enters., Inc.),
479 F.3d 791 (11th Cir. 2007). The bankruptcy judge assigned to this adversary
proceeding is familiar with Electric Machinery Enterprises’s principles and has
applied them with ease in multiple cases when ruling on motions to compel
arbitration in adversary proceedings. See, e.g., Yarbrough v. Green Tree Servicing
LLC (In re Yarbrough), Nos. 07-81329-WRS, 07-08012-WRS, 2010 WL 3885046
(Bankr. M.D. Ala. Sept. 29, 2010); Highway Solutions LLC v. McKnight Constr.
Co. (In re Highway Solutions LLC), Nos. 07-31461-WRS, 08-3013-WRS, 2009
WL 2611949 (Bankr. M.D. Ala. Aug. 24, 2009); Dixon v. Green Tree, Inc. (In re
Dixon), Nos. 05-80643, 06-8054, 2007 WL 703612 (Bankr. M.D. Ala. Mar. 5,
2007). Defendants have not cited any authority demonstrating that application of
Electric Machinery Enterprises’s principles to the claims in this adversary
proceeding will be anything other than straightforward.
There are several district court decisions that persuasively provide support
for this conclusion. One of those decisions is In re Service Marine Industries, Inc.,
No. 00–579, 2000 WL 777912, at *2 (E.D. La. May 30, 2000). In In re Service
Marine Industries, the court denied the motion to withdraw the reference filed by a
creditor named in the debtor’s adversary proceeding. The creditor argued that the
FAA would “play a key role” in the resolution of the adversary proceeding. Id.
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Applying the substantial and material standard, the court found that the FAA did
not require “significant interpretation.” Id. Observing that Fifth Circuit decisions
had set out principles concerning the enforcement of arbitration agreements in
bankruptcy court, the court found that “all that is left for bankruptcy judges to do
when confronted with an arbitration clause is to apply those principles.” Id.; see
also Lucre, Inc. v. Verizon N., Inc., No. 1:07cv120, 2007 WL 1521204, at *5 n.4
(W.D. Mich. May 21, 2007) (noting that § 157(d)’s substantial and material
standard was not satisfied “since the suit [was] expressly based on state law (a state
court rule) and the federal statute implicated, the Federal Arbitration Act, ha[d]
been extensively interpreted by existing precedent”); cf. In re Holman, 325 B.R.
569, 574 (E.D. Ky. 2005) (reasoning that in the adversary proceeding, the
bankruptcy court “w[ould] be able to apply existing Sixth Circuit law regarding the
definition of a fiduciary under ERISA and the breach of a fiduciary’s duties to the
facts” such that withdrawal of the reference was not mandatory under § 157(d));
Herman v. Stetler, 241 B.R. 206, 210 (E.D. Wis. 1999) (denying a motion to
withdraw the reference on grounds that, although the adversary proceeding, which
sought a determination of the dischargeability of a debt, raised issues pertaining to
a plan’s coverage under ERISA and the debtor’s status as a fiduciary, “case law
[was] rich with precedent that c[ould] effectively guide the bankruptcy court in
determining the ERISA issues in the instant action”). Service Marine Industries,
15

Herman, and Holman all found that mandatory withdrawal under § 157(d) did not
apply because the binding case law on the particular area of non-bankruptcy
federal law provided settled instruction for the bankruptcy court’s application of
the non-title 11 law.

These decisions provide persuasive authority for the

conclusion here that binding case law well equips the bankruptcy court to decide
whether Ms. Harrelson’s individual and class claims are subject to arbitration
under the FAA.
Defendants maintain, however, that resolution of whether the arbitration
agreement’s class-action waiver is enforceable presents a novel issue because it
arises in the context of Federal Bankruptcy Rule of Procedure 7023, but their
argument offers no analysis. The nature of the novelty is undiscernible because
Rule 7023 merely adopts the class-action procedures of Federal Rule of Civil
Procedure 23. See Fed. R. Bankr. P. 7023 (providing that Federal Rule of Civil
Procedure 23 “applies in adversary proceedings.”). And the Supreme Court has
spoken on the interplay among Rule 23, the FAA, and class-action waivers in
arbitration agreements. See Am. Express Co., 133 S. Ct. at 2310 (discussing
whether “federal law secures a nonwaivable opportunity to vindicate federal
policies by satisfying the procedural strictures of Rule 23 or invoking some other
informal class mechanism in arbitration” (citing AT&T Mobility, 131 S. Ct.
at 1748)).

Defendants do not cite this authority or explain how Rule 7023
16

transforms the enforceability of the arbitration agreement’s class-action waiver
issue into an issue of first impression. The argument is not persuasive.
In sum, whether the arbitration agreement requires Ms. Harrelson to arbitrate
her claims against Mr. Spray and whether the arbitration agreement’s class-action
waiver is enforceable do not require substantial and material consideration of the
FAA for resolution of the adversary proceeding. Accordingly, Defendants have
not met their burden of demonstrating that § 157(d)’s mandatory-withdrawal
provision applies.
III. CONCLUSION
Defendants DSSC, Inc., and Vann A. Spray have not shown that withdrawal
of the adversary proceeding from the bankruptcy court is mandatory under
§ 157(d). Accordingly, it is ORDERED that their motion and amended motion to
withdraw the reference of Plaintiff Marie Sue Harrelson’s adversary proceeding to
the bankruptcy court (Docs. # 1, 8) are DENIED.
The Clerk of the Court is DIRECTED to close this case.
DONE this 10th day of March, 2015.
/s/ W. Keith Watkins
CHIEF UNITED STATES DISTRICT JUDGE

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