In re Bruce
- Reporters:
- ,
- Before:
- Wesley, Park, Robinson
On appeal, Citi advances two primary arguments. First, Citi argues that a bankruptcy court‘s civil contempt power is limited to the enforcement of its own orders, and, therefore, that the Bankruptcy Code does not authorize one bankruptcy court to adjudicate the claims of a nationwide class of former debtors
WESLEY, Circuit Judge:
Unwelcome as insolvency may be, bankruptcy relief ultimately provides hope for the debtor that a new financial life awaits. The notion of a fresh start is at the Bankruptcy Code‘s core and is typically achieved through a discharge order, which, at a bankruptcy proceeding‘s conclusion, releases the debtor of
In this case, a putative nationwide class of former debtors, led by Kimberly Bruce, claim that Citi violated their respective discharge injunctions. They ask that Citi be held in contempt, and, in addition to contempt sanctions, ask for declaratory relief and restitutionary damages.
As an initial matter, we reject plaintiff‘s suggestion that she has asserted separate and distinct claims for declaratory relief and damages. For one, plaintiff‘s characterization of her complaint is in tension with the complaint itself, which asserts a single cause of action claiming that “[d]efendants have violated
Accordingly, the final question in this appeal is whether plaintiff‘s allegations that Citi should be held in contempt for violating her discharge order are sufficient to survive Citi‘s Rule 12(b)(6) threshold attack.2 The bankruptcy court answered that question in the affirmative. We agree. Accordingly, we affirm in part and reverse in part, and remand for further proceedings consistent with this opinion.
I. Facts
This dispute began in 2009, when Kimberly Bruce, plaintiff in this action, stopped making payments on her Citi credit card account. Eventually, Citi informed credit reporting agencies that she had a balance due of $1124, which Citi “charged off“—that is, adjusted from a receivable to a loss in the bank‘s internal accounting books.
Years later, plaintiff voluntarily filed a Chapter 7 bankruptcy petition in which she listed Citi as a creditor. Her complaint alleges, without any dispute from Citi, that she provided Citi notice of her initial bankruptcy filing and her eventual discharge order, entered in May 2013. That order “released” plaintiff from “all dischargeable debts,” App‘x 29, and enjoined “any attempt to collect from the debtor a debt that has been discharged,” id. at 30.
In September 2013, months after her fresh financial start, plaintiff accessed her credit report and discovered that it still listed her debt with Citi as “charged off,” without any indication it had been discharged in bankruptcy. She notified Citi in December 2013 that its description of her Citi account status—also known
In March 2014, plaintiff successfully moved to reopen her Chapter 7 case and commenced an adversary proceeding seeking to hold Citi in contempt of her bankruptcy discharge order. About two weeks after plaintiff moved to reopen, Citi finally contacted the credit reporting agencies and requested that they remove the charge-off notation on the tradeline referring to plaintiff‘s credit card account.
Plaintiff alleges that Citi‘s refusal to correct her credit report is part of a “willful policy of attempting to lay a trap for Plaintiff and other Class Members until the point that they need an accurate credit report, and they cannot obtain such a credit report without paying on a discharged debt.” App‘x 61. Citi lays this “trap” by “refusing the debtors’ requests to remove ‘charge offs’ and other similar ‘past due’ notations . . . despite [Citi‘s] knowledge that such debts have in fact been discharged in bankruptcy.” Id. at 69–70. “These notations adversely affect Plaintiff‘s and every Class Member‘s ability to obtain credit or employment and have the inherent coercive effect of inducing Plaintiff and all other Class Members to make payment on the debt.” Id. at 68–69.
Plaintiff also contends that although Citi sold plaintiff‘s debt, it maintains ties to it in other ways. For example, she alleges that Citi collects the discharged debt on behalf of the third-party debt collection agencies, and that credit reporting agencies will not permit those agencies (including Midland) to request changes in tradelines listed in the original creditor‘s name. She adds that Citi remained identified as the creditor in the tradeline, notwithstanding that it sold plaintiff‘s debt to Midland. Thus, she continues, Citi knows that unless it correctly reports
Plaintiff alleges that by willfully failing to update credit reports, Citi is “in contempt of this Court,” App‘x 75, she “prays that the practices of [Citi] be declared to be in violation of the rights of Plaintiff and Class Members under the Bankruptcy Code and a contempt of the statutory injunction set forth in
II. Procedural History
This case has made its way to this Court once before. At its outset, Citi moved to compel arbitration based on its credit card agreement with plaintiff. Relying largely on our decision in In re Anderson, 884 F.3d 382 (2d Cir. 2018), this Court affirmed the district and bankruptcy courts’ denial of that motion, reiterating that contempt proceedings for violations of
On remand, Citi moved to dismiss plaintiff‘s complaint, or in the alternative, to strike or dismiss her class allegations. The bankruptcy court, in the decision Citi now appeals, largely rejected the bank‘s request. Although it dismissed plaintiff‘s request for injunctive relief, it otherwise denied Citi‘s motion.3
The bankruptcy court purported to resolve two questions: first, whether plaintiff plausibly pleaded a discharge violation under
With respect to the 12(b)(6) issue, the bankruptcy court concluded that plaintiff plausibly stated a claim for relief. It explained that while mere inaccurate credit reporting without some further act does not violate the discharge, plaintiff
The court then turned to the nationwide class issue and rejected Citi‘s motion to strike plaintiff‘s class allegations. Although it acknowledged that whether one bankruptcy court can enforce other bankruptcy courts’ discharge orders “raise[s] a very close question,” App‘x 264, it grounded that authority in § 105 of the Bankruptcy Code, which provides that a bankruptcy court “may issue any order, process, or judgment that is necessary or appropriate to carry out” the Code.
After the district court certified the bankruptcy court‘s order for direct appeal, App‘x 291, this Court granted Citi‘s request for leave to appeal, id. at 293.
This appeal principally concerns
[O]perates 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, whether or not discharge of such debt is waived.
Plaintiff‘s careful, even novel, pleading strategy raises a threshold issue. The viability of her nationwide pursuit depends on the authority of one bankruptcy court to enforce the discharge orders and injunctions entered by other bankruptcy courts from across the country. It is a novel, broad vision of an injunction‘s enforcement mechanism, and raises thorny issues regarding 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.
I. The Bankruptcy Code does not authorize a bankruptcy court to enforce another bankruptcy court‘s discharge injunction.
Plaintiff asks that the bankruptcy court entertain a nationwide class action contempt proceeding, comprised of the mirroring claims of other discharged debtors who, like plaintiff, requested to no avail that Citi correct their erroneous tradelines. Specifically, the putative class invites the bankruptcy court to enforce
The class-wide relief sought by plaintiff raises a fundamental question: does the Bankruptcy Code authorize one bankruptcy court to employ its contempt power on behalf of other bankruptcy courts in a nationwide class action to enforce those bankruptcy courts’ discharge orders?5
Neither this Court nor the Supreme Court has confronted the issue. However, decisions from both courts, as well as from the courts of appeals that have weighed in on the matter, help guide the way. In the end, as has long been the case outside of the bankruptcy context, a particular bankruptcy court‘s civil contempt authority does not extend beyond the enforcement of its own orders.
For example, although Taggart sets forth the “fair ground of doubt” standard governing a bankruptcy court‘s exercise of its civil contempt authority to enforce
Taggart therefore provides a framework for analyzing the limits of a bankruptcy court‘s civil contempt authority. Courts should understand that authority as coextensive with—not greater than—the civil contempt authority wielded by courts outside of bankruptcy. In short, well-established equity practice regarding the judicial exercise of civil contempt authority guides any inquiry into what that authority looks like in the bankruptcy context.
Plaintiff fails to offer a single example of one court exercising its civil contempt authority on behalf of another court‘s injunction.6 Nor are we aware of any. As telling as that gap is, it‘s of no surprise. The civil contempt power is, at its core, uniquely personal to each court; by providing a mechanism to mandate compliance when a court is confronted with disobedience, it is a necessary corollary to a court‘s authority to issue binding orders. “Courts thus have embraced an inherent contempt authority . . . as a power necessary to the exercise
Further still, a court‘s broad authority to identify, prosecute, adjudicate, and sanction contumacious conduct makes for a “potent weapon,” Taggart, 139 S. Ct. at 1801, which, in Taggart, undergirded the Supreme Court‘s conclusion that civil contempt should not be employed where there is a fair ground of doubt as to the wrongfulness of the defendant‘s conduct. Heeding the Supreme Court‘s cautionary approach, we decline to expand the availability of a bankruptcy court‘s
Plaintiff‘s reasoning is also in tension with our repeated observation that “a bankruptcy court has ‘unique expertise in interpreting its own injunctions and determining when they have been violated.‘” In re Gravel, 6 F.4th 503, 513 (2d Cir. 2021) (quoting In re Anderson, 884 F.3d at 390–91); see also In re Belton, 961 F.3d at 617. She acknowledges as much, but contends that, unlike a judge-crafted, “bespoke” injunction, the generally uniform nature of
As an initial matter, we rejected that line of argument in Anderson, and again in Belton. Specifically, the appellant in Anderson advocated for the arbitrability of discharge violation claims by arguing that because the discharge injunction under
Similarly, upon Citi‘s request in Belton to reconsider our holding in Anderson, we reaffirmed the non-arbitrability of
True, discharge orders, which might often be issued on standard forms,7 trigger a statutory, rather than a judge-crafted, injunction. Yet, beyond the mere
In any event, Taggart does not suggest that the statutory basis of 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 made clear that “traditional civil contempt principles apply straightforwardly to the bankruptcy discharge context,” id., and as explained above, a straightforward application of longstanding civil contempt principles suggests that only the issuing court may exercise its civil contempt powers to enforce its discharge order, and the injunction which springs from it.
Although the bankruptcy court grounded its authority in §§ 524 and 105, Taggart examined those provisions and concluded they incorporate traditional standards of equity practice, see Taggart, 139 S. Ct. at 1801, which, as provided above, includes the principle that a court cannot exercise its civil contempt authority to enforce another court‘s injunction. Moreover, as the Fifth Circuit explained in Crocker, the Bankruptcy Code, at one time, provided that an order of discharge could be registered in another district and “enforced in like manner” in the new district as in the issuing district. See In re Crocker, 941 F.3d 206, 213 (5th Cir. 2019) (quoting Pub. L. No. 91-467, § 3, 84. Stat. 990, 991). However, upon the
In sum, there may be policy considerations that counsel in favor of a nationwide mechanism for a class of former debtors to enforce their respective discharge orders against a common creditor‘s systemic disruption of their new
II. Plaintiff has stated a claim for civil contempt under Taggart‘s “fair ground of doubt” standard.
Only plaintiff‘s individual contempt claim remains. Taggart provides the yardstick to measure her claim: a bankruptcy court may hold a creditor in civil contempt for violation of the discharge order only if, as an objective matter, “there is no fair ground of doubt as to whether the order barred the creditor‘s conduct.” 139 S. Ct. at 1799 (emphasis omitted).
She also explains, in a nonconclusory fashion, the way Citi financially benefits from the practice: third-party debt collection agencies “are willing to pay more” for Citi‘s delinquent receivables given that, due to the confusion created by Citi‘s policy, the agencies “know they can collect on discharged debts.” Id. at 64. Accepting these allegations as true, plaintiff has plausibly alleged that Citi employs a policy and practice of refusing to correct erroneous tradelines to coerce payment of discharged debts. In short, plaintiff plausibly alleges that Citi‘s refusal to correct her tradeline was objectively, and purposively, coercive. See In re Pratt, 462 F.3d 14, 19 (1st Cir. 2006).
Citi offers various arguments as to why plaintiff‘s allegations fall short. None persuade. Citi claims, for example, that
Taken together, plaintiff plausibly claims that Citi‘s refusal to correct the tradeline at plaintiff‘s request was part of a systematic effort to pressure or coerce plaintiff (and similarly situated debtors) to pay off her (and their) discharged debt. Plaintiff pleads facts which, taken as true, establish an intentional course of conduct aimed at collecting discharged debts. In other words, although the “failure of a furnisher of credit information to take affirmative steps to update the information that it has reported on a consumer‘s account is not, standing alone, a violation of [§] 524(a)(2),” In re Ho, 624 B.R. 748, 755 (Bankr. E.D.N.Y. 2021), plaintiff‘s allegations are not so limited.
Citi also suggests that having sold plaintiff‘s debt to Midland pre-bankruptcy, it was no longer her creditor, and therefore is beyond
Moreover, plaintiff alleges that despite the sale to Midland, Citi continued to appear as the sole creditor on the tradeline, and that, by collecting discharged debts and forwarding those payments to Midland, Citi acted as Midland‘s agent and remained involved in the collection of discharged debt—and the value of that involvement generally was reflected in the premium Midland paid Citi for plaintiff‘s debt. App‘x 71. Indeed, plaintiff alleges that under the terms of Citi and Midland‘s agreement, only Citi may “report the sold debts as sold or transferred” and “Midland will not be responsible for correcting or updating information on any debts listed in” Citi‘s name. Id. at 64. The complaint thus plausibly alleges that Citi is “fully aware that [its] deliberate failure to update a discharged debtor‘s . . . account coerces the debtor to pay said account.” Id. at 71. We decline to impose a rule whereby creditors can avoid their obligations under a discharge order by
Throughout its brief, Citi relies on this Court‘s decision in In re Kalikow, 602 F.3d 82 (2d Cir. 2010). That case makes clear that discharge orders are not so limitless to extend to debts incurred post discharge, or to third parties who have “no relation to the reorganization proceedings,” id. at 95, no interest, either indirectly or indirectly, against the debtor, and who did nothing to pressure the debtor into paying a discharged debt. Id. at 95–96. That‘s not this case. Far from having no relation to the reorganization proceeding, plaintiff alleges that she listed her debt with Citi in her bankruptcy petition and provided Citi notice both of that fact, as well as of her eventual discharge. Plaintiff also explains how Citi maintains an interest against the debtor; she describes in detail the way Citi retains control over the tradeline, as well as why its policy of refusing to correct the tradeline is designed to coerce discharged debtors into paying off discharged debts.
CONCLUSION
Accordingly, we AFFIRM IN PART and REVERSE IN PART the bankruptcy court‘s order and REMAND for further proceedings consistent with this opinion.