Second Circuit Declines Class Certification to Debtors Seeking to Hold Creditor in Contempt of Discharge Injunction

Marybeth Ehlbeck

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

A bankruptcy discharge order absolves debtors of their pre-bankruptcy debts and seeks to provide debtors with a fresh start to their financial life. This is achieved through section 524(a)(2) of title 11 of the United States Code (the “Bankruptcy Code”) which provides that a bankruptcy discharge operates “as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor[.]”[1] In Bruce v. Citigroup, the Second Circuit held Citigroup Inc. (“Citi”) in contempt of the plaintiff’s discharge because Citigroup failed to correct plaintiff’s credit report tradeline. The Second Circuit, however, refused to extend its contempt power on behalf of other bankruptcy courts in a nationwide class action of debtors alleging similar failures. In so holding, the Second Circuit found that the bankruptcy court cannot adjudicate contempt claims of a nationwide class because it lacks authority to enforce other bankruptcy courts’ discharge injunctions.

Kimberly Bruce, the plaintiff in Bruce v. Citigroup Inc., filed a petition for relief under Chapter 7 of the Bankruptcy Code, where she listed Citi, the defendant, as a creditor.[2] Prior to her bankruptcy case, Bruce stopped paying her Citi credit card bill. Citi, as a result, notified credit reporting agencies that Bruce had a balance due “which Citi ‘charged off’–that is, adjusted from a receivable to a loss in the bank’s internal accounting books.”[3] Bruce provided Citi notice of her bankruptcy filing and the May 2013 order that “‘released’ plaintiff from ‘all dischargeable debts,’ and enjoined ‘any attempt to collect from the debtor a debt that has been discharged[.]’”[4] In September 2013, Bruce discovered Citi’s debt was still on her credit report and not discharged.[5] Bruce notified Citi of the error. Citi refused, however, to remove the charge-off notation.[6] In March 2014, Bruce then moved to reopen her Chapter 7 case. Bruce sought to hold Citi in contempt of the discharge injunction, under section 524(a)(2), through its failure to correct her tradeline. Bruce additionally sought to “certify a nationwide class of former debtors on the ground that Citi similarly refused numerous post-discharge requests to correct erroneous tradelines.”[7] On appeal, the Second Circuit held Citi’s failure was indeed a violation of the discharge injunction and determined that Bruce had stated a claim for civil contempt. Certification of a class, however, was unavailable under the Bankruptcy Code.[8]

To determine if a creditor may be held in civil contempt for violation of the discharge order, a bankruptcy court applies the Taggart standard, finding a creditor in contempt when “‘there is no fair ground of doubt as to whether the order barred the creditor’s conduct.’”[9] Here, the Second Circuit found this standard satisfied. Citi purposively notated the debt as “charged off” instead of discharged in bankruptcy with knowledge that the inaccuracy damages credit ratings, and that “debtors will ‘often feel it necessary to pay off the debt despite [the] discharge in order to remove the inaccurate information[.]’”[10] Thus, the Second Circuit found such “an act to collect” under section 524(a)(2) where, objectively, it has the practical effect of improperly coercing the debtor into paying off a discharged debt.”[11] Hence, the Second Circuit affirmed the denial of Citi’s motion to dismiss Bruce’s claim for civil contempt.

However, the class-wide relief sought by Bruce posed a different question, which was if one bankruptcy court can “…employ its contempt power on behalf of other bankruptcy courts in a nationwide class action to enforce those bankruptcy courts’ discharge orders?”[12] The Second Circuit answered in the negative. Bankruptcy statutes do not grant courts unlimited authority to hold creditors in civil contempt, as they incorporate “‘traditional standards in equity practice for determining when a party may be held in civil contempt for violating an injunction[.]’’[13] Here, the Second Circuit reasoned that such standards suggest “that only the issuing court may exercise its civil contempt powers to enforce its discharge order, and the injunction which springs from it.” This is because contempt is an affront to the court issuing the order.[14] And, such issuing court is uniquely positioned to determine the appropriateness of civil contempt sanctions and what form they ought to come as they are considerations that can “benefit from the unique insight a bankruptcy court can gain in presiding over a proceeding.”[15]  Expanding a bankruptcy court’s civil contempt power, as a result, could “leave enforcement of the injunctive order of a bankruptcy court in one district to the interpretive whims of a bankruptcy court in another district.”[16] Thus, the Second Circuit found that the class-wide relief Bruce sought was unavailable as a bankruptcy court’s civil contempt authority does not extend to other bankruptcy courts’ discharge orders.