A bankruptcy court has subject matter jurisdiction or power to entertain a nationwide class action alleging contempt of the discharge injunction, according to Bankruptcy Judge Elizabeth S. Stong of Brooklyn, N.Y. She denied a motion to strike nationwide class allegations but did not say how she will rule later on certifying the class.
The opinion is significant for holding that a discharge can be enforced in any district, not just the district where the discharge was granted.
The Nationwide Class
A pair of debtors filed a nationwide class suit in bankruptcy court in Brooklyn, alleging that a bank violated their discharges by failing to report to credit-rating agencies that their debts to the bank had been discharged.
Not waiting for Judge Stong to rule on certification of the class, the bank filed a motion to strike the nationwide class allegations. The bank argued that any claim for violation of the discharge can be made only in the district where the discharge was entered.
Judge Stong denied the motion to strike in a 41-page opinion on April 8. Her opinion discusses everything there is to know about class suits involving discharge violations.
Motion to Strike Wasn’t Premature
The debtors contended that the motion to strike was premature and that any ruling on a nationwide class should await a motion to certify the class under Bankruptcy Rule 7023. Judge Stong agreed that motions to strike class allegations are “generally disfavored.”
The bank countered by contending that the motion was not premature because entertaining a nationwide class was beyond the bankruptcy court’s jurisdiction. The bank took the position that only courts in the district where the discharges were granted would have jurisdiction to enforce debtors’ discharges.
Judge Stong agreed with the bank and ruled that the motion to strike was not premature. She saw the issues about jurisdiction and power as being separate from questions to be decided on a later class-certification motion.
Entertaining a Nationwide Class
Judge Stong addressed the larger question of her jurisdiction or power to make rulings on discharges granted elsewhere. She conceded that issuing courts are generally the proper courts entitled to enforce their injunctions, at least where the injunction had been individually crafted for the case. She noted that the issue was more about comity than jurisdiction.
Discharges are different from individually crafted injunctions. Judge Stong said that discharge is a statutory injunction employing Official Form B318 that must be entered in every case. It is not drafted for a particular case.
Judge Stong held that the class action was within a bankruptcy court’s core jurisdiction, because it dealt with enforcing discharge. Citing cases, Judge Stong said that “bankruptcy courts have certified class actions to address a range of core bankruptcy claims in several circuits, including the Second Circuit.” She also listed “nationwide settlements of class actions asserting discharge injunction violations [that] have been approved by bankruptcy and district courts in several cases within the Second Circuit.”
Judge Stong distinguished cases relied upon by the bank for the proposition that the issuing court alone may enforce an injunction. She said that those cases “address injunctions crafted by particular courts to address the particular circumstances of a particular case.”
Judge Stong denied the bank’s motion to strike the class allegations. “The question of whether a nationwide class, or any class, should be certified in this action is reserved for another day, to be considered upon the making of a motion to certify a class by the Plaintiffs,” she said.
Observations
The opinion is authority for the notion that a debtor may enforce her discharge in another district. The principle is important, for instance, when a debtor moves to another district. Judge Stong’s opinion would stand as precedent allowing the debtor to enforce discharge in her new district.
On the eventual motion for class certification, the plaintiff will face unfavorable dicta from the Second Circuit.
In a footnote, Judge Stong dealt with Belton v. GE Capital Retail Bank, 961 F.3d 612 (2d Cir. 2020), cert. denied, 2021 WL 850624 (U.S. Mar. 8, 2021). There, the Second Circuit ruled that a debtor is not compelled to arbitrate a claim that a creditor violated the discharge injunction.
Significantly, though, Belton included dicta suggesting that the bankruptcy court cannot entertain a nationwide class action seeking redress for a discharge violation. To read ABI’s report on Belton, click here.
The discussion of a nationwide class in Belton was not only dicta. The appeals court also explicitly said that “we have not endeavored to address whether a nationwide class action is a permissible vehicle for adjudicating thousands of contempt proceedings, and neither our decision today nor [Anderson v. Credit One Bank, N.A. (In re Anderson), 884 F.3d 390 (2d Cir. 2018)] should be read as a tacit endorsement of such.” Belton, id., 961 F.3d at 617. To read ABI’s report on Anderson, click here.
The Second Circuit went on to question whether one bankruptcy court would have jurisdiction to hold a creditor in contempt of another court’s order. “Most circuits that have considered the issue have rejected the notion,” the appeals court said. Id.
In other words, Belton’s dicta will be a hurdle on a motion for class certification.
A bankruptcy court has subject matter jurisdiction or power to entertain a nationwide class action alleging contempt of the discharge injunction, according to Bankruptcy Judge Elizabeth S. Stong of Brooklyn, N.Y. She denied a motion to strike nationwide class allegations but did not say how she will rule later on certifying the class.
The opinion is significant for holding that a discharge can be enforced in any district, not just the district where the discharge was granted.
The Nationwide Class
A pair of debtors filed a nationwide class suit in bankruptcy court in Brooklyn, alleging that a bank violated their discharges by failing to report to credit-rating agencies that their debts to the bank had been discharged.
Not waiting for Judge Stong to rule on certification of the class, the bank filed a motion to strike the nationwide class allegations. The bank argued that any claim for violation of the discharge can be made only in the district where the discharge was entered.
Judge Stong denied the motion to strike in a 41-page opinion on April 8. Her opinion discusses everything there is to know about class suits involving discharge violations.