On an issue where the circuits are split, a magistrate judge in Chicago naturally followed the Seventh Circuit by dismissing a claim without prejudice where the debtor was pursuing contempt for violation of the discharge injunction under Section 524(a). Dismissal without prejudice importuned the debtor to renew the discharge claim in bankruptcy court in Chicago.

On the same facts in the same complaint, the debtor also had claims in district court under the federal Fair Debt Collection Practices Act, or FDCPA. As a result, lawsuits based on the same facts will be pending in district court and bankruptcy court side by side. 

The Complaint

The chapter 7 debtor had received a discharge from the bankruptcy court in Chicago. After discharge, the creditor filed a collection action in state court. The debtor responded by filing suit in district court in Chicago alleging violations of the FDCPA, the automatic stay and the discharge injunction.

The creditor filed a motion to dismiss the claims for violation of the stay and the discharge injunction.

With regard to the automatic stay, Magistrate Judge Jeffrey T. Gilbert was skeptical about the claim because the alleged violation occurred after discharge when there was no longer an automatic stay. He said that “there does not appear to be any factual or legal basis for a claim that Defendant’s collection actions violated the previously terminated automatic stay.”

Because briefing was not complete on the automatic stay violation, Judge Gilbert withheld ruling.

The Discharge Violation

The creditor contended in its motion to dismiss that the discharge violation could not be heard in district court. Focusing on discharge, Judge Gilbert quoted the Seventh Circuit for holding that a “‘suit for violation of section 524(c) can be brought only as a contempt action under section 524(a)(2). . . . [A]ffirmative relief can be sought only in the bankruptcy court that issued the discharge.’” Cox v. Zale Delaware, Inc., 239 F.3d 910, 917 (7th Cir. 2001).

Judge Gilbert went on to explain how the Seventh Circuit views a discharge violation as violating not only a statute but also an action in contempt of the bankruptcy court that issued the order of discharge. He added that “numerous courts in this district have dismissed claims for violations of discharge injunctions, concluding such claims must be brought in the first instance to the bankruptcy court that issued the discharge injunction.”

The debtor countered by arguing that retaining the discharge violation claim in district court would promote “judicial efficiency” given that the FDCPA claim was lodged in district court. Citing two district court decisions in Illinois, Judge Gilbert said that “courts have dismissed claims for violations of discharge injunctions notwithstanding the existence of other pending claims, including FDCPA claims.”

Judge Gilbert conceded, however, that the Seventh Circuit “has not directly held [that] district courts lack jurisdiction to hear contempt actions related to a bankruptcy discharge injunction.” Nonetheless, he said that “the Seventh Circuit has made clear that such actions should be raised in the first instance before the bankruptcy court that issued the discharge.” Citing the Second and Ninth Circuits, he said that other circuits “are in accord.”

Judge Gilbert cited the First Circuit for having taken a “different approach” in Bessette v. Avco Fin. Servs. Inc., 230 F.3d 439 (1st Cir. 2000). The Boston-based appeals court saw the district court as having equitable power under Section 105 when there is an alleged violation of a “purely statutory order,” not one “individually crafted.”

Ultimately, Judge Gilbert saw no reason to decide the jurisdictional question, because the local rule automatically referring bankruptcy matters to the bankruptcy court called for “this claim [to] be first heard by the bankruptcy court.” He therefore dismissed the discharge violation claim “without prejudice to her raising such a claim before the bankruptcy court.”

Question

Rather than dismissing, could the magistrate judge have referred the discharge claim to the bankruptcy court under the local rules? Or, could the magistrate judge have referred the entire suit to the bankruptcy court, including the FDCPA claim?

The debtor demanded a jury trial. Perhaps the bankruptcy judge could have handled the entire discharge and FDCPA case until it was ready for trial.