Class Actions for Post-petition Wrongs National Relief Against National Creditors

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Mar 2003

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Editor's Note:

This article marks the debut of this column, which will provide scholarly commentary on current issues.

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The use of bankruptcy proceedings as a method of dealing with the
inadequacy of class actions to cope with mass torts and other mass claims has
become increasingly familiar. A different set of questions is presented by a
putative class action to enforce bankruptcy law or to enforce other, closely
related laws that are violated during the pendency of a bankruptcy proceeding.

These issues are
arising more frequently, but have so far received little attention in the
literature. A number of recent cases take them on. Of the many issues they
raise, this discussion addresses just one: Can the courts certify a
nationwide class of bankruptcy debtors injured by the violation of a
consumer-protection statute or a violation of the Bankruptcy Code? To put the
issue negatively, if a class action under Rule 23 (Rule 7023) is otherwise
appropriate, must the class be limited to debtors in cases pending in the
district where the action is brought?

These cases can be divided into
three categories:

<ol>
<li>Violations of federal consumer-protection laws of general
application that overlap with bankruptcy law, especially the Federal Debt
Collection Practices Act (FDCPA, as we know and love it);

</li><li>Violations of the automatic stay as against the debtor that are
subject to the damage provisions of §362(h);

</li><li>Violations of
the discharge injunction under §524, which has no damage provision.

</li></ol>

In all three, the
question is whether a nationwide class action can be certified when a defendant
creditor has allegedly committed similar violations against many bankrupt
debtors around the country. Of course, the usual requirements for a Rule
23(b)(2) or (b)(3) class action must be satisfied, including common relief or
typicality, generally. If, for example, the violations are a series of
idiosyncratic stay violations differing from debtor to debtor, then there are
not the necessary common issues of fact and law. But if a creditor acts
consistently against a number of debtors in bankruptcy in a way that allegedly
violates one of these statutes, then certification of a class might be
appropriate.

This question
arises from the debtor-centricity of bankruptcy law. How can nationwide
issues be resolved in a bankruptcy court when its jurisdiction is limited to
the res of a debtor and its writ is confined to the district in which it sits? Must the claims be
addressed district by district? A recent case in the First Circuit is a good
example (<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
v. Avco Financial Services Inc., 279 B.R. 442
(D. R.I. 2002)</a>). The defendant, Avco,
had collected under reaffirmation agreements that were never filed with the
court, à la the Sears case in
Massachusetts. The circuit court had held that a contempt action would lie for
violation of the §524 discharge injunction and remanded the case to the
district court for further proceedings. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
F.3d 439 (1st Cir. 2001)</a>. On remand, the district
court held that class certification must be limited to debtors in Rhode Island,
even though Avco is a national company and had apparently applied the practice
nationwide. Accord, <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Beck, 283 B.R. 163 (Bankr. E.D. Pa. 2002)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
v. Associates Home Equity Services Inc., 272
B.R. 266 (C.D. Cal. 2002)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Cline, 282 B.R. 686 (W.D. Wash. 2002)</a>. This position was strongly endorsed by an article that cited older
cases in support of this position and critiqued the cases going the other way.
Ball, Corinne and Meises, Michele J., "Current Trends in Consumer Class
Actions in the Bankruptcy Arena," <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=5…
Bus. Law. 1245 (2001)</a>.

Some
other courts have rejected that limitation and certified national classes for
alleged nationwide abuses by a particular creditor. See <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Nolette, 280 B.R. 868 (Bankr. S.D. Ala.
2001)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Powe, 278 B.R. 539, 280 B.R. 728 (Bankr.
S.D. Ala. 2002)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
United v. Manley, 273 B.R. 229 (N.D. Ala. 2002)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Sheffield, 281 B.R. 24 (Bankr. S.D. Ala.
2002)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Harris, 280 B.R. 876 (Bankr. S.D. Ala.
2001), app. dism., Chrysler Financial Corp v. Powe, 312 F.3d 1241</a>;

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Sims, 278 B.R. 457 (Bankr. E.D. Tenn. 2002)</a>.

For
example, in Nolette, NationsBank (as it then
was) added a fixed fee of $125 to each of its claims for the expenses of
preparing the claim. The practice was nationwide. The court certified a
nationwide class action as to some national issues (e.g., failure to disclose the fee), notwithstanding an argument that
adjudication must be on a district-by-district basis.

Three
points are central. The first is that it is a mistake to begin the analysis
with bankruptcy court jurisdiction. We teach our students to enter the
jurisdictional wonderland of bankruptcy always through one gate: What is the
bankruptcy jurisdiction of the federal district court? Once that question is
answered, then the allocation of function within the federal courthouse can be
addressed. Second, the conduct under attack in each category of case is the
violation of a federal statute, not a court order. Third, all three are
post-petition wrongs against the debtor, not the estate, and therefore are not
property of the estate to be administered under §1334(e) of <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
28. See In re Nolette, 244 B.R. 845 (Bankr.
S.D. Ala. 2000)</a>.

<h3>Consumer Protection Violations Against Bankruptcy Debtors</h3>

Having
those three points in mind, we may start with the simplest case of the
violation of a federal statute of general applicability, the FDCPA. A typical
FDCPA claim is a direct violation of the FDCPA, as when a collection agency
calls the debtor at 2 a.m. It is a violation as to any person, in or out of
bankruptcy. FDCPA §805(a)(1). Beyond doubt, the district court has
jurisdiction of the claims and beyond doubt could certify a nationwide Rule 23
class, if the other elements of Rule 23 are satisfied. Is there anything about
bankruptcy that would require exclusion of bankrupt debtors from such a class?
The court might think so, because the FDCPA claim would overlap with a claim
under §362(h). That problem could be solved by certifying a separate class
(or subclass) of debtors in bankruptcy. The court is simply defining a class.
It has no need to look to its bankruptcy jurisdiction at all. Of course, the
court may be concerned about the overlap between the FDCPA action and a
possible §362(h) claim, but resolution of the interaction between these
two federal statutes is simply part of the court's job in such a case. If
it is denied the assistance of the bankruptcy court's expertise in such
matters, the blame is on our bizarre jurisdictional setup, but this instance is
only one anomaly of many in that system.

<h3>Stay Violations</h3>

If
the debtor is in bankruptcy, the 2 a.m. telephone call also violates
§362(a). There is no question but that a stay violation can be the subject
of a damage recovery, including punitive damages, under §362(h). But the
courts in most of the recent class-action cases have been focused on the status
of such a violation as violation of an injunction punishable by contempt. That
focus leads them to write that the violation of the stay must be redressed
"by the issuing court." See, e.g., <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Cline, 282 B.R. 686 (W.D. Wash. 2002)</a>. But there is no issuing court. The "injunction" is a
statutory provision, not a court order. Its character as an "injunction"
is a legal fiction, a point buttressed by the fact that the usual findings for
an injunction do not have to be made and the usual notice and a hearing are not
needed to bind the entire world. The rationale for the stay is that bankruptcy
is a universal proceeding, as the civil lawyers say, or "in rem," as we common lawyers say. But bankruptcy is not merely a
property proceeding involving the estate. It protects and discharges debtors
and their exempt property as well, so the better description is that bankruptcy
is a universal proceeding. Specifically, the stay is not limited to protecting
the rem. By statute, it also protects the
debtor, who is not a thing, against actions to collect a <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=D….
§362(a)(6)</a>. Without exploring the other
ramifications of that interesting point, suffice to say that §362(h)
simply provides the remedy for enforcing a statutory prohibition that protects
debtors. Not being tied to the estate, it represents a federal right to be
enforced by a federal court. As with any other federal claim (FDCPA, TILA,
etc.), any federal court that is the proper venue for the class representatives'
claims can certify a class, other requirements being satisfied, that will cover
all similarly situated citizens.

Thus,
on the face of it, there is no reason to suppose that a federal district court
faced with a motion for contempt under §362(h) could not certify a class
action if the court concluded that the common questions of law and fact
predominated [Rule 23(b)(3), 7023(b)(3)] or that injunctive relief would be the
primary relief given the class [Rule 23(b)(2), 7023(b)(2)]. If the violation
preliminarily shown is that the defendant's minions made thousands of
telephone calls after 9 p.m. attempting to collect debts from bankrupts across
the nation, only the specifics of damages would remain to be shown. Cf. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
v. Sears, Roebuck & Co., 231 F.3d 970, 979
(5th Cir. 2000)</a> (remanded for
consideration of Rule 23(b)(3) certification). The class-action folks have a
variety of answers to that problem. Other types of stay violations might
require injunctive relief as well. For example, if the only violation is a
continuing monthly charge based on failure to disclose to the court an illegal
fee, injunctive relief is the only sensible reaction.<a href="#4" name="4a">4</a> See <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Nolette, 280 B.R. 868 (Bankr. S.D. Ala.
2001)</a>. Where the violation consists of
an ongoing non-disclosure, it is a direct injury to the integrity of the
judicial system, as well as to the debtor and trustee in bankruptcy.

If
the action is limited to the §362 violation, there is no intrinsic reason
that the bankruptcy court cannot resolve the matter to final judgment, subject
to appeal, because stay violations are core proceedings. See, e.g., <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Sims, 278 B.R. at 487</a>. In doing so, it is exercising the district court's
jurisdiction as it always does, but in this case, it is not its jurisdiction
over a particular rem, but, as Judge Mahoney put
it, over an action in personam. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
B.R. at 849</a>. Because there is no limitation on the
district court's power to establish a national class even though venue is
proper only with regard to the class representatives, there is no limitation on
the bankruptcy court's power to exercise that jurisdiction within the
constraints of §157 of Title 28. The concern about
"bankruptcy" jurisdiction over a multi-case, multi-district class is
a bad pun. The issue is bankruptcy law jurisdiction, not bankruptcy court
jurisdiction. As with any other class action, if venue is proper for the class
representatives in a particular court, a class can be certified that includes
all those claimants who would have been required to bring individual actions in
a number of other federal district courts as a matter of venue. There is
nothing about the debtor-protection side of bankruptcy that is any different.

Another
potential red herring in this jurisdictional analysis is the expressed concern
that there are different legal standards in different judicial districts as to
various elements of such cases. See, e.g., <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Peterson, 281 B.R. 685 (Bankr. E.D. Cal.
2002)</a>. If the difference is
reasonableness of fees, for example, the concern is justified because
geographical variations are differing "facts" requiring individual
adjudication. But some of the cases appear to dwell on differences in
decisional law on various points. No one has ever suggested that a class action
under some other federal statute is barred by differing decisions in various
districts as to questions of federal law. The fact that a district court in
Mississippi has come to a different interpretation than that found in the
Seventh Circuit does not mean a Mississippian has to be excluded from a
national class certified in district court in Chicago.

<h3>Violation of the Discharge Injunction</h3>

The
same analysis applies to §524 and the discharge injunction. Here, there is
no right of recovery in the statute, unlike the FDCPA and §362. But there
is no doubt that it is enforceable by contempt. See, e.g., <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
v. Wells Fargo Bank N.A., 276 F.3d 502 (9th
Cir. 2002)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Musselwhite, 270 B.R. 72 (S.D. Tex. 2001)</a>. Given that the explicit recovery right in §362(h) is also
enforced by contempt procedures, there is no reason to doubt that similar
relief, injunctive and monetary, is recoverable for violation of this statutory
provision (another so-called "injunction") as well. Therefore, precisely
the same logic should apply to a violation. The closing of a bankruptcy case
should not matter, of course, otherwise the discharge injunction would rarely
be enforced. Whether it is enforced by the bankruptcy court or the district
court is an important detail, but a detail nonetheless.<a href="#5" name="5a">5</a>

It
may be that growing judicial hostility will doom national class actions
generally, but there is no reason they should be denied to debtors in
bankruptcy because of confusion about the national scope of bankruptcy law. If
national creditors are to escape compensating those whom they have illegally
harmed, it should not be on these grounds.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Leo Gottlieb Professor of Law, Harvard Law
School. <a href="#1a">Return to article</a>

<a name="2">2</a> Benno C. Schmidt Chair of Business Law, The
University of Texas School of Law. <a href="#2a">Return to article</a>

<a name="3">3</a> This text first appeared at The University
of Texas Annual Bankruptcy Conference in November 2002. We express our thanks
to Profs. Linda Mullenix and Charles Silver for their advice without
implicating them in the result. We also appreciate the research help of Tonya
Shotwell, Texas '04. <a href="#3a">Return to article</a>

<a name="4">4</a> We cannot be sure if the Bolin court would agree. Bolin may bar
injunctive relief for the class. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
v. Sears, Roebuck & Co., 231 F.3d 970, 978
(5th Cir. 2000)</a>. The opinion in that case is so
conclusory on this point it is difficult to tell, especially because Bolin
involved a number of different claims, some of them not lending themselves to
mass treatment. <a href="#4a">Return to article</a>

<a name="5">5</a> One other point of interest is the
intersection of arbitration and bankruptcy as they relate to these issues. The
greatest benefit to creditors of arbitration clauses in consumer
"contracts" is that they may block class-action treatment of
consumer claims. See, e.g., <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
v. Green Tree Financial Corp., 244 F.3d 814
(11th Cir. 2001)</a> (Truth in Lending violations cannot go forward
as a class action because of an arbitration clause), but, see <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3…
Tree Financial Corp. v. Bazzle, 351 S.C. 244,
569 S.E.2d 349 (2002), cert. granted,

123 S.Ct. 817 (Mem.)</a> (2003) (arbitration may go forward as a
class-action arbitration) However, the general rule is that bankruptcy courts
have the power to refuse enforcement of arbitration clauses as to core
proceedings. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Gandy, 299 F.3d 489 (5th Cir. 2002)</a>; <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Hagerstown Fiber Ltd. Ptshp., 277 B.R. 181
(Bankr. S.D.N.Y. 2002)</a>. This power was applied this last year to
TILA claims. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re First Alliance Mortg. Co., 280 B.R. 246
(C.D.Cal. 2002)</a>s. Thus, class actions in bankruptcy may offer a
solution for debtors' lawyers faced with arbitration clauses that make
consumer litigation uneconomic and impractical. <a href="#5a">Return to article</a>

Journal Authors

Elizabeth Warren

Jay L. Westbrook

Journal Date

Saturday, March 1, 2003 - 12:00

Bankruptcy Rule

2003