In re Biery

IN RE: KENNETH L. BIERY SANDRA K. BIERY DEBTORS

CASE NO. 10-23338

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF KENTUCKY COVINGTON DIVISION

Dated: April 14, 2014

MEMORANDUM OPINION AND ORDER

This matter is before the Court on Debtors' motion [Doc. 59] to apply Rule 7023 to their motion for contempt. In their motion for contempt [Doc. 40] (the "Contempt Motion"), Debtors assert that Beneficial Kentucky, Inc. and HSBC Mortgage Services, Inc. ("Respondents") have engaged in systemic violations of discharge orders entered by this Court, including their discharge. They seek to represent a class of similarly aggrieved debtors who have received discharges from this Court, and request that the Court allow them to conduct precertification discovery regarding their anticipated class certification motion. Therefore, Debtors request that this Court exercise its discretion under Federal Rule of Bankruptcy Procedure ("Rule") 9014(c) to direct that Rule 7023, which incorporates Federal Rule of Civil Procedure ("FRCP") 23 by reference, shall apply to the Contempt Motion. Respondents oppose Debtors' motion to apply Rule 7023.

For the reasons stated below, Debtors' motion will be granted.

I. Procedural History

Debtors filed a petition under Chapter 7 on December 22, 2010, and received their discharge on May 3, 2011. On February 12, 2013, they moved to reopen their closed case to file an adversary proceeding against Respondents for violations of their discharge. On February 26,2013, they filed a "Class Action Complaint" against Respondents, alleging that Respondents systemically violated discharge orders of this and other bankruptcy courts and seeking actual damages, punitive damages, and declaratory and injunctive relief. [Doc. 1 in Biery v. Beneficial Kentucky Inc., Adv. No. 13-2005.] Subsequently, Debtors moved for leave to take precertification discovery. [Doc. 7 in Adv. No. 13-2005.]

Respondents never filed an answer or entered an appearance in Debtors' adversary proceeding. Nonetheless, this Court dismissed Debtors' adversary proceeding sua sponte. Biery v. Beneficial Ky. Inc., Ch. 7 Case No. 10-23338, Adv. No. 13-2005, 2013 WL 4602698 (Bankr. E.D. Ky. Aug. 29, 2013). Following a precedent of the Sixth Circuit, Pertuso v. Ford Motor Credit Co., 233 F.3d 417 (6th Cir. 2000), which held that civil contempt is the only remedy for violations of the discharge injunction, and a precedent of this Court, Frambes v. Nuvell National Auto Finance, LLC (In re Frambes), 454 B.R. 437 (Bankr. E.D. Ky. 2011), which held that contempt must be litigated by contested matter, not adversary proceeding, the Court held Debtors had chosen an improper procedural vehicle to bring their claims. The Court further noted that the distinction between contested matters and adversary proceedings was particularly salient in the class-action context, given that Rule 7023 applies automatically in adversary proceedings, but only applies if the Court chooses to direct its application in contested matters. Biery, 2013 WL 4602698, at *3.

After the dismissal of Debtors' adversary proceeding, Debtors filed the Contempt Motion in their bankruptcy case on September 16, 2013, again claiming that Respondents violated their discharge. The Contempt Motion seeks declaratory and injunctive relief, monetary, statutory, actual and punitive damages, attorney's fees, and contempt sanctions. It also originally sought to certify a nationwide class of similarly situated debtors.

The Court ordered Debtors to brief whether Rule 7023, as a matter of law, could be applied in this matter. Debtors submitted the requested memorandum, in which they narrowed the definition of their proposed class to debtors within this District. At a hearing held on October 8, 2013, Debtors passed their class certification request. As a result, this Court entered an order setting a discovery schedule and evidentiary hearing on Debtors' individual motion for contempt. On November 13, 2013, Respondents entered their first appearance in this matter, claiming that Debtors improperly served the Contempt Motion and that they only became aware of this matter when Debtors served this Court's scheduling order. They therefore sought an extension of the scheduling order, which was granted.

Subsequently, Respondents moved under Rule 9014(c) to apply Rule 7068 to Debtors' Contempt Motion. Debtors objected and moved the Court to determine whether their class claims were within the scope of discovery, claiming that Respondents refused to answer any discovery requests which pertained to class certification.

The Court denied Respondents' motion to apply Rule 7068, reasoning that Rule 7068's purposes of encouraging settlement and penalizing the unreasonable refusal of settlement offers, were misplaced in a contempt proceeding, given the Court's interest in learning of and adjudicating contempt of its own orders. The Court treated Debtors' motion to determine the scope of discovery as a motion to apply Rule 7023. It further ordered Respondents to brief whether, as a matter of law, Debtors' Contempt Motion could be adjudicated on a class basis; and if so, whether the Court should exercise its discretion to apply Rule 7023. Respondents submitted the requested brief, arguing that Rule 7023 cannot and should not be applied to the Contempt Motion. Debtors filed a reply. The Court heard argument on Debtors' motion toapply Rule 7023 on February 11, 2014, and at the conclusion of the hearing took the motion under advisement.

II. Analysis

A. Bankruptcy courts have discretion to apply Rule 7023 to contempt proceedings.

The parties initially spar over whether the Court has discretion to apply Rule 7023 to the Contempt Motion. Debtors argue that the Court does, relying on the language of Rule 9014, which provides that bankruptcy courts may apply adversary proceeding rules to any contested matter. Respondents argue that Rule 7023 cannot be applied to motions for contempt because "an order finding a creditor in contempt for violating a debtor's bankruptcy discharge injunction must be entered in that debtor's own bankruptcy case." [Doc. 70 at 4]. Relying on a 1911 Supreme Court case, Gompers v. Bucks Stove & Range, 221 U.S. 418 (1911), which held that civil contempt proceedings are tried as part of the "main cause," Respondents argue that a class contempt motion in Debtors' case would impermissibly adjudicate whether Respondents violated the proposed class members' discharges in a bankruptcy case other than those members' own cases.

The Court rejects Respondents' argument for two reasons. First, Gompers only held that civil contempt is tried by motion in an underlying main case, not as a freestanding proceeding. Adjudicating the potential class members' contempt claims by motion in Debtors' main case does not violate that principle. Second, unlike contempt proceedings in district courts, on which the Federal Rules of Civil Procedure are silent, contempt proceedings in bankruptcy courts are directly regulated by the Federal Rules of Bankruptcy Procedure. Specifically, Rule 9020 provides that contempt proceedings in bankruptcy are governed by Rule 9014, and Rule 9014 confers broad discretion on this Court to apply Rule 7023 to Debtors' Contempt Motion.

1. Gompers

Gompers, decided 103 years ago, was the Supreme Court's first major attempt to clarify what it has since described as the "somewhat elusive distinction between civil and criminal contempt." Int'l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 830 (1994). Gompers involved a contempt proceeding against Samuel Gompers for violations of an injunction entered in a lawsuit between Gompers and Buck's Stove and Range Company. The issue before the Court was whether the contempt proceeding was civil or criminal.

In answering that question, the Court looked to a number of factors that traditionally distinguished civil contempt from criminal contempt at common law. One of the common-law factors the Court considered was whether the proceeding was separate from the original lawsuit between Gompers and Buck's Stove. Civil contempt proceedings, the Court explained, "are between the original parties, and are instituted and tried as a part of the main cause. But, on the other hand, proceedings at law for criminal contempt are between the public and the defendant, and are not a part of the original cause." Id. at 444-45. The Court then applied this rule to the facts before it to determine whether the contempt proceeding on review was criminal or civil. Noting that the contempt motion and all pleadings filed within the contempt proceeding shared the caption of the underlying suit, and that the rules of procedure applicable to the underlying suit were applied in the contempt proceeding, the Court concluded that, procedurally, the contempt proceeding appeared to be civil. Id. at 446-48.

The Gompers rule does not bar the procedures that Debtors request the Court apply in this case. Gompers simply held (or more accurately, observed) that civil contempt proceedings are tried within an underlying main case, not as a freestanding proceeding. The Court honored this holding when it dismissed Debtors' adversary proceeding and held Debtors' only recoursewas a contempt motion filed in their bankruptcy case. The question in this case is whether alleged systemic contempts of dozens of identical discharge injunctions, entered in dozens of bankruptcy cases, must be adjudicated separately in each of the underlying cases, or may be adjudicated by way of a class-motion for contempt filed in one of the underlying cases. Gompers did not involve violations of multiple injunctions entered in multiple cases, and therefore had no occasion to address this question. Nor, of course, did FRCP 23 exist at the time Gompers was decided. In short, Gompers provides little if any guidance here. Here, what controls are the Rules of Bankruptcy Procedure, which regulate contempt proceedings in bankruptcy.

2. Rule...