Can Contempt For Violating Discharge Injunctions Be Pursed In A Class Action? (Bruce v. Citigroup)

By: Donald L Swanson

Can the contempt remedy for a creditor’s violations of the discharge injunction in multiple bankruptcy cases throughout the land be imposed in a class action lawsuit?

• The answer from the First Circuit Court of Appeals is, “No” (see this linked opinion); and
• On January 8, 2023, the U.S. Supreme Court denies certiorari in that case and on that answer (see Bruce v. Citigroup Inc, Case No. 23-470).

Procedural History

Debtor obtains a bankruptcy discharge.

Thereafter, Debtor sues Citigroup in the Bankruptcy Court that granted Debtor’s discharge:

• asserting a contempt claim for alleged violations of Debtor’s own discharge injunction; and
• asserting a class action claim for the same types of violations of other debtors’ discharge throughout the land, under Fed.R.Bankr.P. 7023, which incorporates into adversary proceedings the class action provisions of Fed.R.Civ.P. 23.

Citigroup moves to dismiss both the contempt claim and the class action claim.  The Bankruptcy Court denies that motion, and Citigroup appeals to the Second Circuit.

The Second Circuit affirms on the contempt claim but reverses on the class action claim.

So, Debtor petitions the U.S. Supreme Court for a Writ of Certiorari on the Second Circuit’s dismissal of the class action claim.  At the Supreme Court,

• Citigroup waives its right to respond to Debtor’s Petition; but
• The Supreme Court denies certiorari anyway.

The question presented to the Supreme Court concerns § 524(a)(2) of the Bankruptcy Code, which provides:

• a bankruptcy discharge operates as an injunction against actions to recover on a discharged debt as a personal liability of the debtor;
• the injunction takes effect with entry of the discharge order; and
• together, the order and the injunction prevent debtors from being pressured to repay discharged debts.

Contempt for Abusive Practices

Like many parties aggrieved by the violation of an injunction outside bankruptcy, aggrieved debtors resort to civil contempt to vindicate their rights under the discharge order.

In this case, however, plaintiff sets sights broadly—seeking relief on behalf of a nationwide class, accusing Citi of uniformly flouting the discharge orders of similarly situated debtors throughout the land.

• That’s because Citigroup’s abusive practices, according to Debtor, are pervasive.

–Threshold Issue

Here is a threshold issue for a contempt class action:

• the viability of Debtor’s class action pursuit depends on the authority of one bankruptcy court to enforce the discharge orders and injunctions entered by other bankruptcy courts.

–Novel, Broad Vision that’s Not Authorized

What Debtor proposes is a novel, broad vision of an injunction’s enforcement mechanism, which raises thorny issues about one bankruptcy court’s ability to hold a party in civil contempt on behalf of other bankruptcy courts whose separate discharge orders are alleged to have been violated.

Debtor asks the bankruptcy court to entertain a nationwide class action contempt proceeding, comprised of the mirroring claims of other discharged debtors who, like Debtor, requested to no avail that Citigroup correct their offending actions.

Specifically, the putative class invites the bankruptcy court to enforce not just the discharge order it entered in Debtor’s case, but also those entered for similarly situated debtors by other bankruptcy courts.

The Bankruptcy Code does not authorize such an approach.

Taggart v. Lorenzen

In its Bruce v. Citigroup opinion, the Second Circuit leans heavily into the U.S. Supreme Court’s ruling and rationale in Taggart v. Lorenzen, 139 S. Ct. 1795 (2019).  Here is a summary of how Taggart is applied in Bruce v. Citigroup by the Second Circuit.

It has long been the case, outside bankruptcy, that a particular court’s civil contempt authority does not extend beyond the enforcement of its own orders.

The injunction of § 524(a)(2), along with the bankruptcy court’s § 105 authority to issue any “order” or “judgment” that is “necessary or appropriate” to “carry out” other bankruptcy provisions, bring with them the “old soil” that has long governed how courts enforce injunctions.

The Supreme Court in Taggart cautions:

• although the “old soil” includes “civil contempt,” bankruptcy statutes “do not grant courts unlimited authority to hold creditors in civil contempt”; but
• Instead, bankruptcy statutes (i) incorporate “traditional standards in equity practice” for holding a party in civil contempt for violating an injunction, and (ii) look to cases outside bankruptcy for the details of such standards.

So, the authority to enforce injunctions with civil contempt is coextensive with—not greater than—the civil contempt authority wielded by courts outside bankruptcy.

That means, “civil contempt proceedings leave the offended judge solely responsible for identifying, prosecuting, adjudicating, and sanctioning the contumacious conduct.”

• This equitable principle has been long followed by this Court (the Second Circuit); and
• Debtor fails to offer a single example of one court exercising its civil contempt authority on behalf of another court’s injunction—”Nor are we aware of any.”

Circuit Split—Order Injunction v. Statutory Injunction

Debtor’s Petition for Certiorari identifies a circuit split between the First Circuit Court of Appeals and the Second Circuit. 

The First Circuit allowed a class action contempt proceeding because the injunction is imposed by statute—not by a court order.  The First Circuit explains:

• “Appellant seeks enforcement of the statutory injunction set forth in § 524, not one individually crafted by the bankruptcy judge, in which that judge’s insights and thought processes may be of particular significance”; and
• “Thus, few of the practical reasons for confining contempt proceedings to the issuing tribunal apply here.”

Bessette v. Avco Financial Services, Inc., 230 F.3d 439, 446 (1st Cir. 2000). 

Debtor’s Petition for Certiorari adds that “Bessette’s reasoning has been adopted by numerous lower courts,” citing four opinions from bankruptcy courts in New York and four from bankruptcy courts in Texas—none of which is in the First Circuit.

In contrast, the Second Circuit’s Bruce v. Citigroup opinion rejects the First Circuit’s Bessette reasoning with this analysis.   

• True, discharge orders trigger a statutory, rather than a judge-crafted, injunction. Yet, beyond the mere determination whether a discharge order has been violated, the appropriateness of civil contempt sanctions, and in what form, are considerations that can still benefit from the unique insight a bankruptcy court can gain in presiding over a proceeding.
• Plainly, the bankruptcy court’s familiarity with the matter remains important. In any event, Taggart does not suggest that the statutory basis for the discharge injunction is of any significance in determining its manner of operation or how it might be enforced.
  • To the contrary, the Supreme Court makes clear that “traditional civil contempt principles apply straightforwardly to the bankruptcy discharge context”; and
  • Such principles suggest that only the issuing court may exercise its civil contempt powers to enforce its discharge order and the injunction which springs from it.
• At bottom, plaintiff seeks a bankruptcy-specific expansion of the civil contempt power beyond its longstanding limits at equity, but nothing in the Bankruptcy Code suggests that Congress intended to displace well-established principles regarding the civil contempt power. 

Congressional Action Needed

The Second Circuit goes on to explain, in its Bruce v. Citigroup opinion:

• policy considerations might favor a nationwide mechanism for a class of former debtors to enforce their respective discharge orders against a common creditor’s systemic violations; but
• courts must take statutes as they find them, and, as written, the Bankruptcy Code leaves intact the longstanding equitable principles regarding the enforcement of injunctions—namely, a bankruptcy court’s civil contempt authority does not extend to other bankruptcy courts’ discharge orders in a nationwide class action.

Conclusion

Two separate circuits hold conflicting opinions on whether the contempt remedy for discharge injunction violations can be pursued in a nationwide class action.  The First Circuit says, “Yes.”  The Second Circuit says, “No.”

Presumably, the U.S. Supreme Court denied certiorari on this split in Bruce v. Citigroup so that other courts might weigh-in on the question first.

It will be interesting to see which approach prevails—and how it prevails.

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