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Midland Funding, LLC v. Thomas

United States District Court, W.D. Virginia, Harrisonburg Division

August 13, 2019

MIDLAND FUNDING LLC, and MIDLAND CREDIT MANAGEMENT, Inc., Appellants-Defendants,
v.
KAREN THOMAS, GARY L. BROOKS, Jr., and MARY M. GILLESPIE-BROOKS, individually and on behalf of a similarly situated class of individuals, Appellees-Plaintiffs.

         ON APPEAL FROM THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF VIRGINIA HARRISONBURG DIVISION Nos. 17-AP-05010, 17-AP-05009.

          MEMORANDUM OPINION

          Elizabeth K. Dillon United States District Judge.

         This matter is on appeal from the bankruptcy court. In a consolidated adversary proceeding, Midland Funding LLC and Midland Credit Management, Inc. (Midland) moved to compel plaintiffs and putative class representatives Karen Thomas, Gary L. Brooks, and Mary M. Gillespie-Brooks to arbitrate their claims that Midland violated Federal Rule of Bankruptcy Procedure 3001 and the Fair Debt Collection Practices Act (FDCPA) by filing incorrect proofs of claim for defaulted credit card debt. The bankruptcy court denied Midland's motion, and Midland appealed to the district court. For the reasons set forth below, the court affirms the bankruptcy court's order that plaintiffs' request for sanctions pursuant to Bankruptcy Rule 3001 is not subject to arbitration. The court expresses no opinion on whether the FDCPA claim should be arbitrated because the bankruptcy court expressly reserved ruling on that issue. Midland further argues that the bankruptcy court erred when it did not grant its motion to strike the class allegations from plaintiffs' complaints, but the bankruptcy court did not rule on that issue, so the court lacks jurisdiction to address it.

         I. BACKGROUND

         In 2016, each of the three plaintiffs filed for Chapter 13 bankruptcy. See In re Thomas, No. 16-50396 (Bankr. W.D. Va.); In re Brooks, No. 16-50396 (Bankr. W.D. Va.) In June 2017, plaintiffs filed adversary complaints against Midland, alleging that Midland's standard practice of filing proofs of claim in Chapter 13 proceedings violates Rule 3001 and the FDCPA. Plaintiffs bring these claims as class action claims on behalf of similarly situated people. The two adversary complaints were consolidated by the bankruptcy court on September 28, 2017.[1]

         In August 2017, Midland filed a motion to dismiss. On November 30, 2017, the bankruptcy court denied Midland's motion to dismiss the FDCPA claim but granted Midland's motion to dismiss the Rule 3001 claim because plaintiffs did not allege “sufficient facts in the complaint that demonstrate any amounts of expenses or attorney's fees resulting from the failure of Midland to comply with Rule 3001.” (Dkt. No. 17, Record on Appeal 143.) However, the bankruptcy court granted plaintiffs leave to amend to correct this pleading deficiency. Plaintiffs filed their amended complaint on December 19, 2017.

         On February 1, 2018, Midland filed two motions--a motion to dismiss the amended complaint and a motion to compel arbitration and to strike class action allegations. On September 28, 2018, the bankruptcy court granted in part and denied in part the motion to dismiss.[2] With respect to the second motion--the one at issue in this appeal--Midland argued that plaintiffs' claims were subject to mandatory arbitration pursuant to the credit card agreements for accounts it had acquired from Synchrony Bank. The bankruptcy court observed that Midland was apparently asking it to “stay the proceedings and require the plaintiffs to individually pursue arbitration in order for the arbitrator to find whether Midland has or has not complied with Rule 3001.” (Appellants' App'x 556.) The bankruptcy court then detailed the various types of sanctions allowed by Rule 3001, which are “permissive and not mandatory.” (Id. at 557.) Thus, the bankruptcy court noted that the “discretionary nature of the imposition of such sanctions comports with the reality that the relief exists solely by force of a rule of procedure.” (Id.) The Bankruptcy Rules of Procedure “do not allow for a private cause for damages from violating a rule of procedure . . . . Instead Rule 3001 gives the Court authority to patrol the parties before it to achieve the efficient, speedy, and just resolution of adversarial and contested matters.” (Id. at 558.) The bankruptcy court accordingly denied the motion to compel arbitration because it would be

nonsensical for the Court to order parties to submit to an arbitrator the task of applying and enforcing a procedural apparatus applicable only before this Court. The question of whether an alleged violation of Rule 3001 occurred, and if so whether any relief is appropriate, is not a question of fact or law for arbitration. The Court will not compel the parties to submit procedural mechanisms to arbitration in this case.

(Id.) Regarding the FDCPA claims in Count I, the bankruptcy court found it “appropriate to retain jurisdiction and determine whether the defendants violated procedural rules before deciding whether it is appropriate to submit the FDCPA implications of such alleged violation to arbitration.” (Id.) The bankruptcy court did not address or rule on the merits of Midland's motion to strike class action allegations. (Id. at 554-59.) The bankruptcy court's order states that “defendants' motion to compel arbitration, ECF Doc. No. 21, is DENIED.” (Id. at 561.)

         II. DISCUSSION

         A. Jurisdiction

         Midland filed a timely notice of appeal from the bankruptcy court's order denying Midland's motion to compel arbitration. See Fed. R. Bankr. 8002(a)(1) (“a notice of appeal must be filed with the bankruptcy clerk within 14 days after entry of the judgment, order, or decree being appealed.”). An order favoring litigation over arbitration is immediately appealable pursuant to the Federal Arbitration Act (FAA). See 9 U.S.C. § 16(a)(1)(C); Chorley Enters., Inc. v. Dickey's Barbecue Rest., Inc., 807 F.3d 553, 561 (4th Cir. 2015) (stating that 9 U.S.C. § 16 “authorizes interlocutory appeals from a district court's refusal to either stay litigation pending arbitration under Section 3 of the FAA or compel arbitration under Section 4 of the FAA”); Dillon v. BMO Harris Bank, N.A., 787 F.3d 707, 713 (4th Cir. 2015) (“an order that favors litigation over arbitration is immediately appealable, even if interlocutory in nature.”). Therefore, the court has jurisdiction over Midland's appeal from the denial of its motion to compel arbitration. See In re EPD Inv. Co., LLC, 821 F.3d 1146, 1149 (9th Cir. 2016) (“We have jurisdiction to review the bankruptcy court's order denying the motion to compel arbitration” pursuant to the FAA).

         Midland argues that the court has jurisdiction over its motion to strike class action allegations. Unlike the denial of a motion to compel arbitration, however, there is no automatic right to an interlocutory appeal with respect to a motion to strike, and Midland did not move for leave of court to file an interlocutory appeal as to that issue. 28 U.S.C. § 158(a)(3) (providing that district courts shall have jurisdiction to hear appeals “with leave of court, from other interlocutory orders and decrees”); Fed. R. Bankr. 8004(a), (b) (stating the procedural requirements for requesting leave to appeal from an interlocutory under § 158(a)(3)). Midland argues that the court should exercise pendent appellate jurisdiction over the bankruptcy court's refusal to strike the class allegations. The doctrine of pendent appellate jurisdiction, however, cannot be used to append issues to an already existing interlocutory appeal. As the Fourth Circuit explained in a bankruptcy appeal where appellate jurisdiction over an interlocutory order denying a motion to compel arbitration was “authorized solely by 9 U.S.C. § 16(a)(1)(A), ” to “apply the doctrine of pendent appellate jurisdiction in this context would be to sanction the conversion of a narrow, statutorily authorized interlocutory appeal into a full-blown appeal, precisely the effect that the . . . Court [has] sought to avoid.” Moses v. CashCall, Inc., 781 F.3d 63, 80 (4th Cir. 2015) (citing Swint v. Chambers Cnty. Comm'n, 415 U.S. 35, 45 (1995)). Midland also argues that the court should treat its notice of appeal as a motion for leave to appeal and enter an order granting leave to appeal this issue. The court declines to do so because the bankruptcy court did not address the merits of Midland's argument that plaintiffs waived their right to pursue a class action. As a result, there is nothing for this court to review on appeal with respect to the class action allegations, and the court will not address that issue in this appeal.

         B. ...


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