In re Wildwood Villages, LLC, Case No. 3:20-bk-02569-RCT
| Decision Date | 04 May 2021 |
| Docket Number | Case No. 3:20-bk-02569-RCT |
| Parties | In re Wildwood Villages, LLC d/b/a Wildwood Country Resort, Debtor. |
| Court | U.S. Bankruptcy Court — Middle District of Florida |
THIS CASE came before the Court for oral argument on the Motion to Allow Claim (Doc. 109) (the "Motion"), filed by the Creditors and Class Plaintiffs/Class Representatives, Vaughn R. Harris, Cheryl M. Harris, Art Spengler, Terrance Piotrowicz and Susan Piotrowicz (the "Class Plaintiffs"), the Debtor's response to the Motion (Doc. 146) (the "Response"), and the joinder to the Response (Doc. 305), filed by secured creditors Level Four Investments, LLC and North Tract, LLC. The issue presented is whether the Class Plaintiffs' proof of claim (the "Class Claim") should be permitted in this Subchapter V small business case. For the reasons set forth below, the Court will not authorize a class claim, but will establish simplified procedures designed to protect the interests of the members of the putative class.
Debtor filed a petition for relief under Subchapter V of Chapter 11 on August 28, 2020. The Debtor is a developer and has owned the recreational facilities and the common areas of Wildwood Country Resort ("Wildwood") since 2003.1
As of the petition date, Debtor was already involved in litigation, dating back to 2012, with the Class Plaintiffs in Florida state court (the "State Court Case").2 In the State Court Case, the Class Plaintiffs, who are current and former owners of lots in Wildwood, seek damages and injunctive relief against Debtor. Specifically, the State Court Case centers around the Class Plaintiffs' allegations that the Debtor had been overcharging the residents of Wildwood on assessments that the residents are required to pay pursuant to the Declarations of Restrictive Covenants to which each of the subdivisions in the community was subject.
In 2017, the state court entered an order that certified a class of less than one hundred and fifty current and former lot owners in Wildwood to pursue the claims asserted in the Class Plaintiffs' second amended complaint,3 other than the claims for fraud (the "Class Certification Order"). The state court, however, has not resolved any of the substantive claims asserted. Liability for damages and all claims for declaratory and injunctive relief remained pending as of the petition date.
By the Motion, the Class Plaintiffs seek authority to allow a class claim under Rule7023 of the Federal Rules of Bankruptcy Procedure ("Rule 7023").4 The underlying basis for the Class Claim is the state court litigation against Debtor and others.
In its Response, Debtor argues that class action claims are disfavored in bankruptcy proceedings and that allowing the Class Claim would unduly burden and delay the reorganization of this Subchapter V case. Specifically, Debtor asserts that Class Plaintiffs are seeking class certification to assert claims that are not equally divisible, extend over too long a time, and involve too many estimated components to meet the requirements of Rule 23 of the Federal Rules of Civil Procedure ("Rule 23"). Debtor also argues that the Class Claim is weighted towards the approximately $1,500,000 in legal fees and that this case is an example of how the class device can become a "lawyer's vehicle,"5 resulting in the primary beneficiary of the class certification being the lawyers.6 Ultimately, Debtor argues that Class Plaintiffs cannot satisfy the requirements of Rule 23(a) and Rule 23(b).
To expedite the protracted litigation in this case, the Court previously entered a comprehensive Case Management Order (the "CMO").7 The CMO has been amended twice at the request of the parties. Relevant to this order, the CMO directs that any claim for an equitable lien or constructive trust be set forth in an adversary proceeding to be filed on or before June 14, 2021. Further, it is anticipated that such an adversary would name securedcreditors having liens against Debtor's real property that are impacted by the equitable lien claims asserted. Debtor's secured creditors were not named in the State Court Case.
Most courts conclude that class proofs of claim are permissible in bankruptcy proceedings.8 The determination, however, of whether to allow and certify a class claim remains within the discretion of the bankruptcy court. Here, Class Plaintiffs ask the Court to invoke Rule 7023 in the contested matter related to Debtor's objection to the Class Claim.
Although the Bankruptcy Code and Rules do not provide "express guidance" regarding the Court's exercise of its discretion in applying Rule 7023, 9 Several factors inform a court's decision whether to extend the application of Rule 23 to a proof of claim, including: "(1) whether the class was certified pre-petition; (2) whether the members of the putative class received notice of the bar date; and (3) whether class certification will adversely affect the administration of the estate."10 These factors are commonly referred to as the "Musicland factors," and "[n]o one factor isdispositive; a factor may take on more or less importance in any given case."11
Once a determination has been made to invoke Rule 7023, then the proposed claim must be examined considering the requirements for class certification in Rule 23. At that point, the analysis applying Rule 7023 is consistent with that under Rule 23.
The Small Business Reorganization Act ("SBRA") was enacted on August 23, 2019 and became effective on February 19, 2020.12 The provisions of SBRA are contained in Subchapter V of Chapter 11 of the Bankruptcy Code. The statute is designed and focused on reorganizing small businesses quickly and efficiently.13 The original definition of a small business included a cap for unliquidated debts of $2,725,625. That cap has been temporarily increased to $7,500,000 for two years in view of the global COVID-19 pandemic.
Because a Subchapter V case is intended to provide for an expedited process, some of the requirements that are involved with a typical Chapter 11 case, which can add layers of expense and complexity, have been eliminated. Examples of these streamlined and cost-reducing reorganizational procedures include:
Although these "extraordinary powers and cost-saving provisions granted to small business debtors are certainly laudable,"22 it is important to keep in mind that "[t]he overall purpose and function of the Bankruptcy Code is to strike a balance between creditor protection and debtor relief."23 The procedural safeguards put in place to facilitate an expeditious process in a Subchapter V case help achieve an appropriate balance.24
As Subchapter V was only recently enacted and as class proofs of claim in a typical Chapter 11 case are not a routine occurrence, it is not surprising that no court has yet addressed the issue of whether a class proof of claim is allowable in a Subchapter V case. So, to this extent, Debtor is correct that this is an issue of first impression. Nevertheless, the Court rejects Debtor's initial argument that a class proof of claim is prohibited in a Subchapter V case.
Essentially, Debtor argues that a class proof of claim circumvents Congress' intentthat there should not be creditor committees in a Subchapter V case. While true that creditor committees are disfavored in Subchapter V cases, the statute permits a bankruptcy court to use its discretion and appoint a creditors' committee in an appropriate case.25 Similar to the allowance of a class claim, the appointment of a committee in a Subchapter V case is within the discretion of the court. The Court can envision possible scenarios where a creditors' committee or a class claim may be an efficient and appropriate vehicle in a Subchapter V case, particularly while the debt limits are set at a higher level.
Accordingly, the Court does not rule out the possibility of a class claim in a Subchapter V case. Instead, the Court will apply the traditional analysis in exercising its discretion to determine (i) whether invocation of Rule 7023 is appropriate to permit the Class Claim and, if so, (ii) whether the Class Claim filed by Class Plaintiffs satisfies the requirements of Rule 23.
Importantly, the Court must first determine that it is appropriate to apply Rule 7023 prior to analyzing whether the requirements of Federal Rule 23 have been satisfied.26 As explained by the court in Chaparral Energy:
Whether to permit a class action proof of claim is a matter of discretion. In exercising that discretion, a two-step analysis is performed. First, the court must decide whether it is beneficial to apply Bankruptcy Rule 7023, via Bankruptcy Rule 9014(c), to the claims administration process. Second, the court must determine whether the requirements of Federal Rule 23 have beensatisfied, such that a class proof of claim may properly be filed.27
As previously noted, courts generally look to the Musicland factors in deciding whether to invoke Bankruptcy Rule...
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