Court Allows Class Action and Private Right of Action for §524 Violations

In a Memorandum Opinion addressing a motion to dismiss an adversary complaint and for reconsideration, the United States Bankruptcy Court for the Southern District of New York (the Court) ruled (1) that a bankruptcy court could entertain a class action claim for declaratory relief arising from violation of the discharge injunction and (2) that a private right of action exists for a violation of the discharge injunction.  On the class action issue, the Court distinguished a declaratory relief action from a contempt action in light of the Second Circuit case Bruce v. Citigroup Inc., 75 F. 4th 297 (2nd Cir. 2023), which held that a bankruptcy court of one district could not enforce through contempt any discharge order arising in another district, making  a nationwide class action for contempt impossible.   On the private right of action issue, the Court observed that the Second Circuit had not ruled on the issue and based its ruling on an analysis of the factors in Cort v. Ash, 422 U.S. 66 (1975).  Anderson  v. Credit One Bank, N.A., (In re Anderson), ___ B.R. ___, 2025 WL 2758521 (Bankr. S.D. N. Y. 2025).  View the  opinion.

Facts

In an earlier series of rulings made by a (retired) predecessor judge the Court had certified a class of former debtors who had received a bankruptcy discharge under 11 U.S. C. § 524 and against whom defendant Credit One Bank, N.A. (the Bank) had falsely reported discharged debt as due and owing on their credit reports.  The initial action was for contempt based on violation of the discharge injunction.  Subsequent to the earlier certification, the Second Circuit issued an opinion in Bruce v Citigroup, Inc., which held that  the Bankruptcy Code does not authorize a bankruptcy court to hold a party in contempt for violating another bankruptcy court’s discharge injunction.  Bruce, 75 F. 4th at 302. 

The Court then allowed the plaintiff to amend the class complaint to allege a claim for declaratory relief and damages based on the same discharge injunction violation.  The Bank challenged two things about that amendment in the motion to dismiss.  First, it argued that the amended class complaint violated the principal tenet of Bruce, which held that a bankruptcy court could not enforce a different court’s discharge injunction and the declaratory relief action sought to do that very thing.  Secondly, the Bank asserted that there was no private right of action for violation of § 524.  In earlier rulings, the Court had overruled the Bank’s arguments.  Not to be deterred, the Bank brought motions for reconsideration of those decisions under Bankruptcy Rule 9023, which incorporates Fed. R. Civ. P. 59, alleging manifest error of law. 

The Memorandum Opinion responded to those reconsideration motions, denying them in all respects. Although the Memorandum Opinion touched on other issues between the parties, this review focuses only on the ruling on the two arguments enumerated above.

Reasoning

Class Certification

The Bank asserted that certain language in Bruce and In re Anderson, 884 F. 3rd 388 (2nd Cir. 2018), precluded the declaratory judgment claim, with the Second Circuit finding that “the discharge injunction is an order issued by the bankruptcy court…[V]iolations of this court-ordered injunction are enforceable only by the bankruptcy court and only by a contempt citation.”  Anderson, 884 F. 3d at 391. The Court distinguished this language from the amended claim, which did not seek to enforce the discharge injunction but rather sought a declaration that acts already committed by the Bank were a violation of § 524.  Once this declaratory judgment was entered, then each member of the class could take that finding back to the issuing court and seek damages based on the finding.  The Court determined that Bruce did not specify “that only a singular bankruptcy court has the exclusive authority to declare that there has been a violation of its own section 524(a)(2) Discharge Injunction.” 

The Court also observed that the motion for reconsideration was only rehashing arguments which had been rejected before, so it did not meet the criteria of Rule 59.  Therefore on both procedural and merits grounds the Court denied reconsideration of the class certification.

Private Right of Action

The Court began its discussion of this claim by noting that the Second Circuit had left it for another day: “[W]e do not decide whether the discharge injunction provision should be construed implicitly to create a cause of action for the violation, in addition to a contempt remedy.”  Garfield v. Ocwen Loan Servicing, L.L.C.,811 F. 3d 86, 91-92 (2nd Cir. 2005).  The Court concluded that it must independently determine whether § 524 implicitly created a private right of action by applying the four factors set forth in Ash v. Cort: (1) is the plaintiff among the class for whose benefit the statute was enacted: (2) is there legislative intent to either create or deny such a remedy; (3)is a private right consistent with the underlying purpose of the legislative scheme; and (4) is the cause of action one traditionally relegated to state law such that it would be inappropriate to have federal law control.

The Court analyzed the factors in light of the statute and the class and decided the statute implied a private right of action. To support its conclusion, the Court cited several California bankruptcy and district court opinions from around 2000 finding the private right.  Accordingly, the Court also denied reconsideration on this issue.

Author’s Comments

I will leave to the courts in the Second Circuit to interpret the impact of the Bruce decision on certification of a national class, although the Court’s points distinguishing Bruce seem thin to me.  I do take direct issue with the Court’s ruling on the private right of action  It cited three or four cases from California district and bankruptcy courts, decided between 1999 and 2001.  However, the Court failed to notice that the cases are no longer good law in the Ninth Circuit.  In Walls v Wells Fargo Bank. N.A., 276 F. 3d 502, 507-8 (9th Cir. 2002), the Ninth Circuit specifically ruled that there was no private right of action for violation of the discharge injunction. The Court did not cite any other reported decisions to support its ruling.

The Court’s error in citing those cases is a good lesson for practitioners.  Shepardizing the cases does not show them reversed by Wells, which did not mention them since they were not precedent.  It would take additional research to turn up the Ninth Circuit authority. The lesson here is that before relying on nonprecedential bankruptcy court cases from 25 years ago, one should check to make certain there is no precedent in that circuit to the contrary.   

[The Commercial Finance Newsletter is written by an ad hoc group of layers in the Business Law Section of the California Lawyers Association.  This review was written by the Hon. Meredith Jury, U.S. Bankruptcy Judge, Central District of California (Ret.), a member of the ad hoc group.   The opinions contained herein are solely those of the author.]