The opinion is Bruce v. Citigroup Inc., Case No. 22-1000, decided August 2, 2023, by the U.S. Second Circuit Court of Appeals.

The opinion addresses this question:

  • Did Citigroup violate Debtor’s discharge injunction by refusing to correct an inaccurate credit report?

The Second Circuit answers the question, “Yes,” under a motion to dismiss Debtor’s Complaint. What follows is a summary of that ruling and analysis.

Taggart v. Lorenzen, Precedent

According to the U.S. Supreme Court’s Taggart v. Lorenzen opinion, the governing legal standard is this:

  • A bankruptcy court may hold a creditor in civil contempt for violating Debtor’s discharge order only if “there is no fair ground of doubt as to whether the order barred the creditor’s conduct.”

Debtor’s Complaint satisfies that standard, the Second Circuit declares. Here’s how.

Allegations of Deliberate Coercion

Debtor alleges that, despite Debtor’s bankruptcy discharge, the credit report for Debtor’s Citigroup debt:

  • lists Citigroup as a creditor, and
  • incorrectly lists Debtor’s balance as “charged off,” instead of discharged in bankruptcy.

Debtor says she asked Citigroup to update the credit report, but Citigroup refused.

Debtor says that Citigroup’s refusal is part of a deliberate policy of coercing debtors to pay off discharged debts. Debtor explains that Citigroup is fully aware of its coercive effect on debtors because:

  • Citigroup mails “collection letters” to debtors before their bankruptcy filings, (i) stating that “charge offs” will ruin their ability to obtain credit, and (ii) promising to remove the “charged off” report if the delinquent debt is paid in full;
  • after entry of debtor’s discharge order, Citigroup knows the existence of such “charged off” inaccuracy in credit reports will damage debtor’s credit rating; and
  • debtors often feel the need to pay off a discharged debt to remove the inaccurate information from their credit report.

Debtor explains, further, how Citigroup financially benefits from such a practice:

  • third-party debt collection agencies are willing to pay more for Citigroup’s delinquent receivables with the inaccurate information; and
  • that’s because they know they can collect on discharged debts that are incorrectly reported as “charged off.”

So, Debtor has plausibly alleged that Citigroup refuses to correct erroneous credit reports to coerce payment of discharged debts and that such refusals are objectively, and purposively, coercive.

Citigroup Arguments are Unpersuasive

Citigroup raises various arguments—but none is persuasive. Here are examples.

–First Argument

Citigroup argues that the discharge injunction of § 524(a)(2) applies only to affirmative efforts. Whereas, Debtor only alleges that Citigroup failed to act on accounts Citigroup sold years earlier—and a failure to act cannot violate the discharge injunction.

This argument does not work because Debtor’s Complaint describes a broader course of conduct that includes:

  • Citigroup’s refusal to correct post-discharge credit reporting errors;
  • Citigroup’s knowledge of how and why the post-discharge “charged off” notation pressures former debtors to pay discharged debts;
  • Citigroup’s intention to take advantage of, and financially benefit from, the fear Citigroup created by its pre-bankruptcy notice to debtors;
  • Citigroup’s control of credit reporting, despite previously selling the debt to a debt collection agency; and
  • Citigroup’s systematic effort to pressure or coerce Debtor (and similarly situated debtors) to pay off discharged debts.

There is no § 524 “affirmative act” deficiency here. An intentional and systematic refusal to update a credit report, upon debtor’s request, constitutes “an act to collect” under § 524(a)(2) where, objectively, it has the practical effect of improperly coercing the debtor into paying off a discharged debt.

–Second Argument

Citigroup argues that, since it already sold Debtor’s debt before Debtor filed bankruptcy, Citigroup is no longer Debtor’s creditor—and is therefore beyond the reach of § 524(a)(2)’s discharge injunction.

“Not true,” says the Second Circuit.

For starters, Debtor’s discharge order specifically prohibits “any attempt to collect from the debtor a debt that has been discharged.”

Although that order says all “creditors” are enjoined, it also makes clear that its reach applies more broadly—to all efforts at collecting a discharged debt.

Moreover, Debtor alleges that:

  • despite the pre-bankruptcy sale of Debtor’s debt, Citigroup continues to appear as the sole creditor on the credit report;
  • by collecting discharged debts and forwarding those collections to the debt purchaser, Citigroup acts as the purchasers agent and remains involved in the collection of discharged debts; and
  • the value of Citigroup’s continuing involvement in the debt it sold is reflected in the premium the buyer paid to Citigroup for Debtor’s debt.

Debtor alleges further that, under the terms of the agreement between Citigroup and the debt purchaser:

  • only Citigroup may report the sold debts as sold or transferred; and
  • the buyer is not responsible for correcting or updating credit report information on any debts listed in Citigroup’s name.

Debtor’s Complaint plausibly alleges that Citigroup is fully aware that its deliberate refusal to update a discharged debtor’s account coerces the debtor to pay that account. And so, the Second Circuit declares:

  • “We decline to impose a rule whereby creditors can avoid their obligations under a discharge order by covertly passing their debt off to third parties”; and
  • Citigroup “remains within § 524(a)(2)’s reach.”

–Third Argument

Citigroup’s arguments rely on In re Kalikow, 602 F.3d 82 (2d Cir. 2010), which holds that the discharge injunction has no effect on parties having “no relation” to the bankruptcy.

Such reliance is misplaced.

In re Kalikow cannot apply here because Citigroup is heavily involved in Debtor’s bankruptcy, based on Debtor’s allegations that:

  • Debtor listed the Citigroup debt in her bankruptcy schedules;
  • Debtor provided Citigroup notice of both the bankruptcy filing and the discharge;
  • Citigroup retained control over Debtor’s credit report; and
  • Citigroup had a policy of refusing to correct the credit report, for the purpose of coercing Debtor into paying off the discharged debt;

Result

The Second Circuit’s opinion concludes with this result:

  • There is no fair ground of doubt that, if the Complaint allegations are true, Citigroup’s conduct amounts to a violation of the discharge injunction.

Conclusion

Inaction, when combined with an improper and coercive purpose, can result in a violation of the discharge injunction. That’s the gist of the Second Circuit’s ruling in Bruce v. Citigroup.

The Bruce v. Citigroup opinion makes sense. So, it will be interesting to see how this opinion plays out and how it, ultimately, squares with the U.S Supreme Court’s Fulton v. City of Chicago opinion (which says that a creditor’s inaction cannot violate the automatic stay—in a similarly coercive context).