United States: Second Circuit Strikes Down Attempted Bankruptcy Contempt Proceedings In Class Context

In a recent decision, Bruce v. Citigroup, Inc., et al., the United States Court of Appeals for the Second Circuit clarified the limits of bankruptcy court jurisdiction over class actions. Specifically, the court rejected a bankruptcy court's ruling that allowed a plaintiff's nationwide class action to survive Defendant Citibank, N.A.'s ("Citi") motion to dismiss and strike class allegations. Following its sister Circuits, the Second Circuit held that the Bankruptcy Code does not permit a bankruptcy court to adjudicate contempt claims of a nationwide class because it lacks authority to enforce other bankruptcy court's discharge injunctions.

Bruce sued Citi for allegedly violating a bankruptcy order discharging plaintiff's debt and enjoining attempts to collect on the discharged debt, alleging Citi reported her debt as "charged off" without noting that the debt was "included in bankruptcy," failed to timely request a correction of the tradeline reporting after plaintiff's notification of the error, and willfully engaged in these practices to increase its financial benefit when selling debt to third party debt buyers. While the Second Circuit agreed these allegations were sufficient to withstand dismissal as to the plaintiff individually, it reversed the bankruptcy court's decision upholding the claims on behalf of a nationwide class.

In denying Citi's motion to strike the class allegations, the bankruptcy court held that Section 105 of the Bankruptcy Code allows it to "issue any order, process, or judgment that is necessary or appropriate to carry out" the Code. Bruce v. Citigroup Inc., No. 22-1000-bk (Bankr. S.D.N.Y.) (quoting 11 U.S.C. § 105). The Second Circuit, however, closely scrutinized this argument and began its analysis with the Code section under which plaintiff sought relief, 11 U.S.C. § 524(a)(2), which provides in relevant part that a bankruptcy discharge:

While this section is intended to prevent creditors from pressuring debtors into paying discharged debts, the Second Circuit declined to adopt plaintiff's theory that any bankruptcy court could hold violating creditors in contempt, citing the long-standing principle that a "court's civil contempt authority does not extend beyond the enforcement of its own orders." Doing so, it cautioned, could "wreak havoc on the federal courts to leave enforcement of the injunctive order of a bankruptcy court in one district to the interpretive whims of a bankruptcy court in another district." Alderwoods Grp., Inc. v. Garcia, 682 F.3d 958, 970 (11th Cir. 2012).

The rationale employed by the Second Circuit closely follows the issues and trends our firm identified in its 2020 article published in the Consumer Finance Law Quarterly Report and presented at the Conference on Consumer Finance Law Debt Collection Symposium. Jarrod D. Shaw & Benjamin J. Sitter, et al., Limitations On Bankruptcy Court Jurisdiction To Adjudicate Nationwide Class Actions Alleging Violation Of Discharge Injunction Under Section 524(A)(2), 74 Consumer Fin. L.Q. 328 (2020). At that time, the majority of lower courts as well as the Seventh, Ninth, and Eleventh Circuits had all held bankruptcy courts did not have authority to enforce other bankruptcy discharge injunctions, and, consequently, it was impermissible to adjudicate claims on behalf of a class with orders from various courts across the nation.

Indeed, we predicted that the minority view, which included opinions from lower courts within the Second Circuit, was in question after the Second Circuit, Fifth Circuit, and Supreme Court issued decisions rebuffing the purported "fundamental difference" between injunctions under the Bankruptcy Code and those granted under Federal Rule of Civil Procedure 65. While the question has not yet reached the Supreme Court to unify these decisions, we anticipate the trend will continue across Circuits-adopting the majority view that bankruptcy courts have no authority to enforce discharge injunctions on behalf of debtors who received such orders from other courts. In any event, the Bruce decision should mark the end of a flurry of class actions brought in bankruptcy courts within the Second Circuit.

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