Business Law

Golden v. Discover Bank (In re Golden) (Bankr. E.D.N.Y.)

The following is a case update written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, analyzing a recent decision of interest:

SUMMARY

In Golden v. Discover Bank (In re Golden), ___ Bankr. ___, 2021 WL 3051896 (Bankr. E.D.N.Y., July 19, 2021) (“Golden”), the United States Bankruptcy Court for the Eastern District of New York (the “Court”) held that it could entertain a class action for violation of the discharge injunction that included putative class members who received their Chapter 7 discharges from other bankruptcy courts in other districts.

Golden can be found here.

FACTS

The debtor scheduled Discover Bank (“Discover”) among her creditors for an education loan (which she used to help her with law school!). Discover objected neither to the dischargeability of her debt to it nor to her discharge. She duly received her discharge under Bankruptcy Code (the “Code”) § 524. Later, Discover began trying to collect the discharged debt from the debtor. The debtor sued Discover in the Court for violation of the discharge in injunction and various related claims, alleging that Discover tried to induce her to pay the discharged debt by misrepresenting the scope of the exception to discharge for education loans. The debtor added a claim for a nationwide class action under by Fed. R. Civ. P. 23 (incorporated by Fed. R. Bankr. Proc. 7023) asserting that Discovery had engaged in the same conduct nationally with other discharged debtors.

Discover filed a motion to strike the class allegations under Fed. R. Civ. P. 12(f) (as incorporated by Fed. R. Bankr. P. 7012). In the motion, Discover argued, among other things, that even if the class otherwise met the standards of Rule 23 the Court could not ever certify it because the Court could only grant relief for discharge injunctions issued in the bankruptcy court for Eastern District of New York (the “District). The debtor opposed the motion. Although the Court considered various preliminary issues and arguments on the merits, the fundamental question was whether the Court could enforce extra-District discharge injunctions. Based in part on some cases (there is a split in authority on the issue), Discover asserted foremost that only the issuing court can enforce an injunction. The debtor claimed, in response, that the statutory discharge injunction is uniform and employs a standard document (see Federal Bankruptcy Form 3018) that require no special knowledge to enforce. The Court sided with the debtor, denying Discover’s motion.

REASONING

The opinion is long and thorough, covering many issues. Its fundamental questions were two: was the motion premature; and could it enforce discharge injunctions not issued in the District for the class.

The principal preliminary issue the Court considered was whether the motion raised issues that implicated the class certification issues of Rule 23 and was therefore premature. On this question the Court agreed with Discover that the motion depended on issues independent of those—numerosity, commonality of legal and factual issues, claim typicality and adequacy of the debtor as a class representative—it would have to address regarding class certification. None of these issues, the Court concluded, related to whether it had the power to enforce extra-district discharge injunctions. In other words, to decide the motion it would not have to make any rulings that affected the potential class certification issues. Moreover, should it grant the motion, the class issues would be moot. Therefore, it made sense to dispose of the motion first. Another preliminary issue that garnered a lot of attention from the Court and parties was whether the Court had subject matter jurisdiction over the matter, but all sides seemed to agree that it did, so the extended and repeated analysis of the subject in the opinion does not warrant review here.

The core issue of the opinion is the Court’s analysis of whether it can enforced discharge injunctions issued by courts outside of the District. As the opinion notes, there is split in authority (with a similar split on the parallel issue of enforcing extra-district automatic stays). In denying the motion, the Court focused on the cases supporting its conclusion and the standard nature of the discharge injunction (at least in Chapter 7, see Code § 524(a)(2), (a)(3); Federal Bankruptcy Form 3018). This uniform injunction. it reasoned, meant that there were no issues unique to a case to which the discharge injunction is tailored. Thus, any court presented with the relevant facts is equally well positioned to enforce the discharge injunction, whether or not it was issued extra-district. This is in contrast to the typical litigated injunction that is tailored to a specific situation with which the issuing court is most familiar, even if the post-injunction facts regarding the alleged transgressing conduct are fungible among courts. Other points of interest that the Court made include that allowing class actions for discharge violations does not conflict with 28 U.S.C. § 1334(e)’s exclusive grant of jurisdiction over estate property to the home court because estate property is not at issue in such an action and is consistent with Code § 105(a)’s grant of equitable power to bankruptcy courts to vindicate the purposes of the Code within the confines of the Code’s specific provisions.

AUTHOR’S COMMENT

The Court is right that generally enforcement of the standard discharge injunction in Chapter 7 requires no special familiarity with the underlying bankruptcy cases for a proper decision. Moreover, even if it did, Discover’s own argument that the courts outside the District cannot enforce the injunction effectively admits that a another judge in the same district as the issuing judge but who is not familiar with a particular bankruptcy case nevertheless can enforce the discharge. If that is so, then familiarity with the particular underlying case cannot be an obstacle to enforcement of the discharge injunction. And if that is so inside the district, it is equally so outside the district. And if going outside the district is objectionable because it might be inconvenient for the affected creditor to defend himself (e.g., in a class action), there are other solutions to that problem (e.g., a venue motion).

But careful as it is, Golden leaves hanging many questions. For example, what is the importance, if any, of the fact that although the scope of the discharge in bankruptcy cases other than Chapter 7s also is statutorily defined, there is no standard form of discharge injunction order such as appears in Form 3018? (Indeed, Form 3018 is not so much a form of order as a general explanation of what the discharge covers.) Finally, although such a class action as in Golden may be consistent with § 1334(e), arguably it conflicts with 28 U.S.C. § 1409(a)’s placement of venue in the debtor’s home court. And could a debtor who received a discharge in one district but has since moved to another bring a discharge violation action for herself and a putative class in the new district?

In any case, what may really be motivating this debate is some discomfort with a rule that does not give the issuing judge the first crack at vindicating the integrity of his proceedings by dealing with an alleged violation of his orders, whether they are injunctions or other forms of order. See, e.g., Cline v. First Nationwide Mort. Corp. (In re Cline), 282 B.R. 686, 69s (W.D. Wash. 2002) (nationwide class action for stay violation transgresses “the vested interest a court has in punishing those who disobey its orders”). That point is not undermined because it sometimes is necessary to put such issues in front of a judge other than the one who issued the order, such as when the issuing judge is ill, retired or deceased, or when courts reassign cases for various reasons (e.g., to balance the workload). (See, e.g., Fed. R. Civ. P. 63 and Fed. R. Bankr. P. 9028 governing disability of a judge). Note that the question of the issuing judge is not usually implicated in typical class actions because they ordinarily concern not mass violations of orders or injunctions, but as-yet unaddressed initial claims made for alleged intrusions on the plaintiff class’s plaintiffs’ rights. Whether the efficiencies of a class action for mass violations of a certain kind of order (such as a discharge injunction) that might otherwise beg for the attention of the issuing judge outweigh the judge’s interest in protecting the integrity of his proceedings is a worthy question, but too broad for this report.

These materials were authored by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, a member of the ad hoc group, with editorial assistance by Meredith Jury, (bankruptcy judge, C.D. Cal. (Ret.)), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.


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