Burge Discusses Upcoming 2nd Circuit Decision on Bankruptcy Court Jurisdiction After Nationwide Navient Injunction

The Eastern District of New York Bankruptcy Court entered a nationwide injunction to curb debt collection abuses, but the Second Circuit will soon consider whether Bankruptcy Courts have jurisdiction over a nationwide class of debtors.

Late last year, in Homaidan v. Navient Solutions, LLC, the Bankruptcy Court for the Eastern District of New York entered a preliminary injunction enjoining Navient from taking any action to collect on thousands of private student loans made to borrowers who received bankruptcy discharges nationwide. By Navient’s own account, this injunction has forced them to cease collections on over 7,300 loans nationwide. Now, in an upcoming case, the Second Circuit will shortly resolve whether bankruptcy courts can grant this kind of nationwide relief, or whether they are limited to remedying abuses to debtors who received discharges in their districts.

The Eastern District of New York Bankruptcy Court’s Nationwide Injunction

Some student loans, including qualified education loans, are nondischargeable in bankruptcy.  A “qualified education loan” is a private loan made for educational expenses at an eligible institution that does not exceed the student’s cost of attendance, after accounting for other grants, scholarships, and financial aid. The Plaintiffs in Homaidan allege that Navient has a practice of reinstating collections after bankruptcy on all private student loans to eligible institutions as if they were qualified education loans, without first determining whether the loan amount was within the cost of attendance for the educational institution.  As a result, Plaintiffs allege that Navient is violating many thousands of borrowers’ discharges by collecting on their discharged loans that were in excess of the cost of attendance.  To remedy those abuses while the action was pending, Plaintiffs sought a preliminary injunction barring Navient from collecting on any private loans in excess of the cost of attendance from any borrower nationwide.

On the merits of the injunction, the EDNY Bankruptcy Court found that the Plaintiffs had shown a likelihood of success on the merits because cost of attendance is an objective measure and Navient could not justify its collection activity by relying on boilerplate certifications in the borrower’s promissory notes that contradict the objective cost of attendance calculated by the institutions. The Court also found that Plaintiffs had demonstrated irreparable injury, the balance of hardships weighed in their favor, and the public interest was served by an injunction because of the importance of the “fresh start” promised by bankruptcy to debtors and because Navient has no legal interest in (and no public interest could be served by) continuing to collect on discharged loans.

Importantly, the EDNY Bankruptcy Court also found that it had jurisdiction to enjoin Navient’s collections nationwide, including for debtors who had obtained discharges in other districts. Navient had argued that the discharge injunction was enforceable only through an action for contempt, which must be sought in the Court that issued the injunction, citing the Fifth Circuit’s recent ruling in In re Crocker, 941 F.3d 206 (5th Cir. 2019). The EDNY Bankruptcy Court rejected that argument, noting that the discharge injunction is a national form created by statute, that issues without any involvement by a bankruptcy judge. Pursuant to 11 U.S.C. § 105, the Court had authority to issue any order necessary to carry out the provisions of the Bankruptcy Code, including enforcing the discharge injunction. Because enforcing the discharge injunction was a core proceeding, the EDNY Bankruptcy Court found it had jurisdiction pursuant to 11 U.S.C. § 1334(b) to consider all violations that affected a putative nationwide class.

The Second Circuit’s Coming Decision in Bruce

The continuing pendency of the EDNY Bankruptcy Court’s injunction, however, will depend on the Second Circuit’s upcoming decision in the Bruce v. Citigroup matter.  In that case, the Bankruptcy Court for the Southern District of New York held that it had jurisdiction over a putative nationwide class of debtors who alleged that Citigroup failed to properly update borrowers’ credit reports after they received discharges of their consumer credit card debts. Citigroup obtained leave to take a direct appeal to the Second Circuit on the issue of whether a bankruptcy court can adjudicate claims for contempt predicated on alleged violations of discharge injunctions issued by courts in other districts.

Bruce will represent the Second Circuit’s first opportunity to consider directly the ability of a bankruptcy court to certify a nationwide class of discharged debtors, and to take sides in a circuit-split between the Fifth Circuit in Crocker and the First Circuit in Bessette v. Avco Financial Services, Inc., 230 F.3d 439 (1st. Cir. 2000). As the amici National Consumer Bankruptcy Center notes, a nationwide “class action is uniquely appropriate to enforce the bankruptcy discharge,” where individual debtors may not have the time or resources to litigate their claims and the potential for hundreds or thousands of cases undermines a chief purpose of the Bankruptcy Code – the efficient administration of cases. If the Second Circuit rejects a nationwide class action, there may be no effective way to bring actions to ensure that creditors respect the discharge in consumer bankruptcy cases.

Jason Burge of Fishman Haygood, LLP represents the plaintiffs, Hilal Homaidan and Reehan Yousseff in the Homaidan matter, along with his co-counsel George Carpinello and Adam Shaw of Boies Schiller Flexner, LLP, and Lynn Swanson of Jones, Swanson, Huddell & Garrison, LLP.  George Carpinello and Adam Shaw are also representing Kimberly Bruce in the Bruce matter.