Class Actions Brief Blog

Bankruptcy, like the class action, is a form of collective adjudication. It is usually regarded as an alternative to the class action, in which the rights of creditors (often in the hundreds, thousands, or even millions) against one or more debtors can be determined through special procedures that need not meet the requirements for class certification.

A recent decision, however, posed a variation on the traditional dichotomy: is the class action a viable remedy for redressing alleged violations of bankruptcy law by classes of debtors?

Putative Class Alleging Discharge Violations In Connection With Student Loans

In In re Golden (Golden v. Discover Bank), 2021 WL 3051896 (Bankr. E.D.N.Y. July 19, 2021), the plaintiff (Golden) was a debtor in a Chapter 7 bankruptcy case in the Eastern District of New York. She had obtained a discharge in 2016 but then reopened the case in 2017 to litigate whether certain student loans had been discharged.

In May 2020, Golden filed an action in her bankruptcy case against Discover, the originator of her student loans, seeking to represent a nationwide class of discharged debtors who had obtained private student loans from Discover exceeding the cost of attendance at their institutions. Golden alleged that loans in excess of the cost of attendance, unlike most student loans, are not exempt from a bankruptcy discharge. She alleged that Discover had unlawfully and intentionally sought to collect those loans despite the discharges entered in her case and the cases of the putative class members.

As the court noted, the discharge is one of the fundamental concepts in bankruptcy law. At the end of a successful bankruptcy case (whether under Chapter 7, 11, or 13), the debtor receives a discharge (ordered by the bankruptcy court) that prohibits creditors from seeking to recover their pre-petition debts from the debtor (unless the particular debt is exempt from discharge under the Bankruptcy Code). Under section 524(a)(2) of the Bankruptcy Code, the discharge “operates as an injunction” against the collection of pre-petition debts. With the debtor discharged from pre-petition debts, the creditor is left with the remedies available under the Bankruptcy Code (for example, distribution in a liquidation under Chapter 7, or rights under a plan of reorganization under Chapter 11). The discharge gives the debtor the “fresh start” that is a major purpose of the Bankruptcy Code.

Can a Court Find Violations of Injunctions Entered By Other Courts?

Golden did not assert a private cause of action for violations of the discharge injunction—no doubt because many courts have found no such action exists. Instead, she sought to have the court make civil contempt findings for violations of the discharges entered in the putative class members’ cases, and then order compensatory damages for all similarly situated debtors as well as attorneys’ fees and costs.

There is no doubt that an individual debtor has such remedies from the bankruptcy court that entered the discharge (if in fact a violation of the discharge has occurred). The major obstacle to Golden’s strategy was a jurisdictional question: could a bankruptcy court in the Eastern District of New York enforce discharge injunctions that had been entered by other bankruptcy courts? As observed in In re Haynes (Haynes v. Chase Bank USA N.A.), 2014 WL 3608891, at *6 (Bankr. S.D.N.Y. 2014), the majority of previous courts have answered no, concluding that the court entering an injunction must enforce it, and effectively precluding a nationwide class for violations of injunctions entered in bankruptcy cases.

The Golden court disagreed, and denied Discover’s motion to strike class allegations. The court acknowledged that the court entering an injunction (here, the discharge injunction) has jurisdiction to enforce it. But the court held this did not mean other courts could not also enforce those injunctions. The court distinguished the discharge injunction from injunctions entered in ordinary civil litigation under Rule 65. The discharge injunction “is a statutory injunction, and a product of the Bankruptcy Code itself.” In practice, it is “a form, a national form, which is issued in every case when there is, in fact a discharge,” and is “not a handcrafted order.”

The court found additional support for its position in the fact that, unlike other courts, the bankruptcy court’s equitable authority is not solely conferred by the All Writs Act (which the court acknowledged is court-specific). A bankruptcy court also has power under Bankruptcy Code section 105(a) to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of” the Bankruptcy Code. The court also relied on previous cases where bankruptcy and district courts had approved nationwide class action settlements of discharge violation claims (and thus implicitly concluded they had jurisdiction to do so).

The court further found it had subject matter jurisdiction over the class claims under 28 U.S.C. § 1334 (the bankruptcy jurisdiction of the federal courts). The court rejected the argument that section 1334(e) (giving the “district court in which a case under title 11 is commenced or is pending” exclusive jurisdiction over the property of the debtor and property of the estate) because the discharge did not concern property of the debtor or the estate, but instead each debtor’s right to be free of further collection efforts.

Takeaways

Although the Golden case is still in its earliest stages (and has not proceeded to the class certification stage), the principles the court espoused are potentially significant. The reasoning would give any bankruptcy court in the country jurisdiction to adjudicate nationwide class actions seeking remedies for discharge violations. One could imagine creative plaintiffs seeking to extend the reasoning to violations of other injunctions of statutory origin in bankruptcy cases (such as the automatic stay)—or even injunctions of statutory origin in other areas of the law. The case presents fundamental questions concerning the nature of contempt and the authority to enforce injunctions. Other courts will undoubtedly have to determine whether enforcement of other courts’ orders—even in the context of a form injunction such as the discharge—is consistent with the fundamental jurisdictional scheme of the federal courts.