Ralph M. Cox, on behalf of himself and others similarly situated v. Zale Delaware, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-4239
Ralph M. Cox, on behalf of himself
and others similarly situated,
Plaintiff-Appellant,
v.
Zale Delaware, Inc.,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 1670--Elaine E. Bucklo, Judge.
Argued September 12, 2000--Decided February 8, 2001
Before Posner, Coffey, and Manion, Circuit Judges.
Posner, Circuit Judge. A large class-action suit
has grown out of a tiny acorn of a dispute. In
1993 Ralph Cox filed a voluntary petition for
bankruptcy under Chapter 7 of the Bankruptcy
Code. In the list of debts that he submitted to
the bankruptcy court he listed a debt to Zale,
from which he had bought (on credit) a ring in
which Zale retained a security interest. About a
month after the submission of the list of debts
he signed an agreement with Zale reaffirming the
debt and agreeing to pay the unpaid balance of
$218.93 at the rate of $15 a month. The next
month the bankruptcy proceeding wound up with an
order discharging Cox from all his listed debts--
including the debt to Zale, because the
reaffirmation agreement had not been filed with
the bankruptcy court.
The failure to file had an additional
significance besides preventing the court from
learning of the agreement and so deleting the
debt to Zale from the list of discharged debts.
Section 524(c) of the Bankruptcy Code provides
that an agreement reaffirming a dischargeable
debt "is enforceable only if . . . such agreement
has been filed with the court." 11 U.S.C. sec.
524(c)(3). The purpose is to help assure that the
agreement is voluntary on the debtor’s part
rather than coerced and does not put such a

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crushing weight on his shoulders that it prevents
him from making the "fresh start" that is one of
the goals of bankruptcy law. In re Turner, 156
F.3d 713, 718 (7th Cir. 1998); In re Duke, 79
F.3d 43 (7th Cir. 1996); see generally Grogan v.
Garner, 498 U.S. 279, 286 (1991); In re Renshaw,
222 F.3d 82, 86 (2d Cir. 2000). Provided there is
no coercion or harassment of the debtor, the
creditor’s offer of reaffirmation is not deemed
an attempt to collect the debt and therefore does
not violate the automatic stay, the statutory
injunction against creditors’ seeking to collect
their debts from a debtor after he’s entered
bankruptcy. In re Duke, supra; Pertuso v. Ford
Motor Credit Corp., 233 F.3d 417, 423 (6th Cir.
2000); In re Brown, 851 F.2d 81, 84 (3d Cir.
1988). Cox’s argument that Zale’s offer violated
the automatic stay is therefore frivolous.
But the reaffirmation agreement was never filed,
and was therefore invalid even though the offer
itself had not been improper. Bessette v. Avco
Financial Services, 230 F.3d 439, 444 (1st Cir.
2000); In re Turner, supra, 156 F.3d at 718.
Section 524(c) is explicit that such an agreement
is enforceable only if all the statutory
conditions, including filing, are satisfied. The
record is silent on why the agreement was not
filed. Cox argues that Zale has a practice of not
filing such agreements because it fears that
bankruptcy judges will disallow them, though the
judge cannot do that if the debtor is represented
by counsel, as Cox was. 11 U.S.C. sec.
524(c)(6)(A); In re Grinnell, 170 B.R. 495
(Bankr. D.R.I. 1994); In re Dabbs, 128 B.R. 307,
309 (Bankr. D. Fla. 1991). The argument, though
implausible in a case such as this in which the
debtor was represented by counsel in his
bankruptcy proceeding, cannot be evaluated on the
present record.
The reader may be wondering why a debtor would
ever agree to pay a dischargeable debt, and why a
secured creditor would care about securing an
agreement that the debtor pay, since a discharge
in bankruptcy does not extinguish a secured
creditor’s right to enforce his security
interest. Dewsnup v. Timm, 502 U.S. 410 (1992);
In re Penrod, 50 F.3d 459, 461 (7th Cir. 1995);
In re Be-Mac Transport Co., 83 F.3d 1020, 1025
(8th Cir. 1996). The answer to the second
question, as explained in our Penrod opinion, 50
F.3d at 461-62, is that secured creditors are
frequently undersecured, especially when the cost
of foreclosing on a security interest is factored
in, and so they would like to collect the debt
directly from the debtor rather than liquidate
their security interest. The answer to the first
question is that the debtor may prefer to retain
the property in which his creditor holds a

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secured interest, rather than avoid paying the
creditor but lose the property to repossession or
foreclosure. An understanding of the incentives
of the parties to debt-reaffirmation agreements
will turn out to be important to deciding on the
proper remedy for violation of the statutory
requirement that such agreements be filed with
the bankruptcy court.
Back to our case. Years passed and the
bankruptcy proceeding was long over with and Cox
had paid off the reaffirmed debt in full when he
brought this suit on behalf of himself and all
others similarly situated--meaning all other
customers of Zale who had signed debt-
reaffirmation agreements that Zale had not filed
with the bankruptcy court. The suit sought to
rescind the agreement and recover the amounts
that Cox (and the other members of the class in
similar situations) had paid Zale after the
bankruptcy court had entered its order
discharging his listed debts. Cox based federal
jurisdiction on 28 U.S.C. sec. 1334(a), which
gives the federal district courts exclusive
jurisdiction over suits arising under the
Bankruptcy Code. The district court referred the
suit to the bankruptcy court (which technically
is a division of the district court) pursuant to
28 U.S.C. sec. 157(a) (see also 28 U.S.C. sec.
1334(b)), which authorizes such references. That
court permitted Cox to reopen his bankruptcy case
in order to present his claim for rescission. Why
the old case should have been reopened rather
than a new one filed is a mystery that the
parties have not explored; but it has no
practical importance beyond the question whether
a filing fee had to be paid, Central Laborers’
Pension, Welfare & Annuity Funds v. Griffee, 198
F.3d 642, 644 (7th Cir. 1999), so we ignore it.
But the court then dismissed the reopened case
on the ground that section 524(c) does not create
a private right of action for violation of its
requirement that a debt-reaffirmation agreement,
to be enforceable, be filed with the bankruptcy
court. Cox’s exclusive remedy, the judge ruled,
was a motion in the reopened bankruptcy
proceeding that Zale be adjudged in contempt of
court for violating the order of discharge by
trying to collect a discharged debt, and be
suitably sanctioned. To similar effect, see
Bessette v. Avco Financial Services, supra, 230
F.3d at 444-45. A still more recent decision,
Pertuso v. Ford Motor Credit Corp., supra, 233
F.3d at 421-23, agrees with Bessette that section
524(c) creates no private right of action, but
disagrees that the contempt power can be used to
punish violations of the filing requirement, id.
at 423 n. 1, though its disagreement may have
been shaped by the facts of the case, as we’ll

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see. Both cases hold, correctly in our view, that
remedies against debt-affirmation agreements
contended to violate the Bankruptcy Code are a
matter exclusively of federal bankruptcy law. Id.
at 426; Bessette v. Avco Financial Services,
supra, 230 F.3d at 447-48; see also MSR
Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d
910, 913-14 (9th Cir. 1996). That extinguishes
the plaintiff’s claim for unjust enrichment,
which is based on state law.
In holding that section 524(c) does not create
a private right of action, the Sixth Circuit in
Pertuso and the district court and bankruptcy
court in the present case emphasized that
Congress explicitly created a private right of
action for violation of 11 U.S.C. sec. 362, the
provision that creates the automatic stay to
which we referred earlier, yet did not do so in
section 524(c), and that the Supreme Court is
reluctant to imply private rights of action in
federal statutes. E.g., Suter v. Artist M., 503
U.S. 347, 363-64 (1992); Thompson v. Thompson,
484 U.S. 174, 187 (1988); California v. Sierra
Club, 451 U.S. 287, 297-98 (1981); Transamerica
Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 24
(1979); Touche Ross & Co. v. Redington, 442 U.S.
560, 576 (1979). With all due respect, we think
those emphases misplaced. The private rights of
action that the Court is reluctant to read into
federal statutes are rights to obtain damages for
statutory violations remediable by public
agencies. Cox is not seeking damages, and section
524(c) is enforceable only by private parties. A
statute regulating purely private rights that
makes a contract void makes the contract
rescindable by a party to it, especially when the
other party to the contract is trying to enforce
it, so that the contract’s illegality is
interposed by way of defense, rather than as the
basis for an independent suit. E.g., Transamerica
Mortgage Advisors, Inc. v. Lewis, supra, 444 U.S.
at 18. If a statute declaring a type of contract
unenforceable does anything, it creates a defense
to a suit to enforce such a contract.
It is thus a non sequitur for Zale to argue that
because section 524(c) does not create a right to
seek damages for violation of the requirement
that a debt-reaffirmation agreement be filed with
the bankruptcy court, Cox would have had no
defense to a suit by Zale to enforce the
agreement. Suppose Cox had realized the agreement
was unenforceable before he had completed paying
off the debt and so had refused to complete
payment. Had Zale sued him for breach of
contract, he could have successfully interposed
the defense that the contract was unenforceable.
(Otherwise an unenforceable contract would be
enforced!) In other words, he could have sought

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rescission in that suit. It is true that to
obtain rescission and thus get his $219 back, he
would have to revest Zale with its security
interest in the ring and perhaps compensate Zale
for the rental value of the ring during the
period since he signed the debt-reaffirmation
agreement, on the theory that had it not been for
that agreement Zale would have repossessed (or at
least would have had the right to repossess) the
ring. When a contract is rescinded, the parties
have to be put back to where they were before the
contract was made, more precisely to where they
would have been had they not made the contract in
the first place. Fleming v. United States Postal
Service, 27 F.3d 259, 262 (7th Cir. 1994);
Resolution Trust Corp. v. FSLIC, 25 F.3d 1493,
1504 (10th Cir. 1994). Hence the relevance of the
rental value of the ring.
It makes no difference, however, whether the
contract is rescinded in a suit for rescission or
by the successful interposition of a defense to a
suit to enforce the contract. Hogue v. Pellerin
Laundry Machinery Sales Co., 353 F.2d 772, 774
(8th Cir. 1965); Rosewood Corp. v. Fisher, 263
N.E.2d 833, 838 (Ill. 1970); Amato v. Edmonds,
408 N.E.2d 1172, 1175 (Ill. App. 1980). The
effect of rescinding a debt-reaffirmation
agreement is the same in either case: the debt is
discharged in bankruptcy but the creditor is
revested with his security interest. That does
not make the debtor’s victory Pyrrhic (if we
disregard the minuteness of the stakes in
relation to the expense of litigation), because
often the value of the security interest is too
slight to incite the creditor actually to enforce
it.
If we are right so far, it can make no
difference, at least as regards drawing any
inference from the right conferred by section
362(h) to seek damages for violation of the
automatic stay, that Cox sought rescission after
rather than before completing payment under the
reaffirmation agreement. A contract may be
rescinded after full performance on both sides,
see, e.g., Finke v. Woodard, 462 N.E.2d 13, 18
(Ill. App. 1984); Seneca Wire & Mfg. Co. v. A.B.
Leach & Co., 159 N.E. 700, 702 (N.Y. 1928); E.
Allan Farnsworth, Contracts, sec. 4.4, p. 228 and
n. 2; sec. 4.15, p. 261 (3d ed. 1999), provided
that it is possible to put the parties back in
the position they would have occupied had they
not made the contract in the first place, and
that was possible here, as we have just seen. The
debtor cannot wait forever to rescind an invalid
debt-reaffirmation agreement, or he’ll be met
with a defense of statute of limitations or of
laches, but neither is pleaded here. We add that
suits under the Bankruptcy Code, presumably

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including suits for rescission, can proceed as
class actions in appropriate circumstances. Fed.
R. Bankr. Pro. 7023; In re American Reserve
Corp., 840 F.2d 487 (7th Cir. 1988); Bolin v.
Sears, Roebuck & Co., 231 F.3d 970, 973, 975 (5th
Cir. 2000); Bessette v. Avco Financial Services,
Inc., supra, 230 F.3d at 446.
But--and it is a big "but"--we have yet to
consider the remedial scheme of section 524
itself, a matter potentially of great relevance
to the question whether a suit for rescission of
a debt-affirmation agreement invalidated by that
section is proper. Section 524(a)(2) provides
that an order discharging the debtor from his
debts "operates as an injunction against the
commencement or continuation of an action, the
employment of process, or an act, to collect,
recover, or offset any such debt as a personal
liability of the debtor, whether or not discharge
of such debt is waived." Until the addition of
section 14(f) to the Bankruptcy Act in 1970 (the
section that is now section 524(a)(2) of the
Bankruptcy Code), a discharge was merely an
affirmative defense that the debtor could plead
if later sued by the holder of one of the
discharged debts. 4 Collier on Bankruptcy para.
524.LH.[1] (15th rev. ed., Lawrence P. King ed.
2000). Section 524(a)(2) not only prohibits but
also enjoins such suits, as well as other
collection actions, and so the creditor who
attempts to collect a discharged debt is
violating not only a statute but also an
injunction and is therefore in contempt of the
bankruptcy court that issued the order of
discharge. Pertuso v. Ford Motor Credit Corp.,
supra, 233 F.3d at 421; In re National Gypsum
Co., 118 F.3d 1056, 1063 (5th Cir. 1997); 4
Collier on Bankruptcy, supra, para. 524.02[2][c].
The question we have to decide is whether that
remedy is exclusive, or whether, as Cox has done,
a debtor can sue to rescind a contract by which a
creditor attempted to collect a debt that had
been discharged.
If the debt-reaffirmation agreement was
ineffective to take Cox’s debt to Zale off the
list of debts that were discharged in the
bankruptcy proceeding, it may seem to follow as
the night the day that Zale violated the
discharge order (which section 524(a)(2), to
repeat, deems an injunction) by "an act to
collect" a discharged debt, namely billing Cox
periodically in accordance with the reaffirmation
agreement. Bessette v. Avco Financial Services,
Inc., supra, 230 F.3d at 445, so holds, but
Pertuso v. Ford Motor Credit Corp., supra, 233
F.3d at 424-25, is to the contrary, pointing out
that the debtor, there as here represented by
counsel when he signed the reaffirmation

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agreement, made the payments called for by the
agreement voluntarily. He wanted to hold on to
the property that he would have lost had the
creditor repossessed the property to enforce its
lien in it (though we have noted that often the
creditor will not bother to do this because of
the small value of the lien). The violation of
section 524(c) thus was technical, trivial, and
arguably, indeed, condoned and hence no violation
at all, and certainly not the sort of thing that
would warrant a proceeding for contempt. The
debtor or his lawyer could have found out by a
simple inquiry whether the agreement had been
filed, had either of them thought that important,
as doubtless neither did, since the debtor wanted
to honor the agreement even though not legally
obligated to. It is the same here. Cox’s debt to
Zale was listed on his schedule of discharged
debts; his lawyer could have advised him that,
the debt having been discharged, Cox didn’t have
to keep paying Zale--though the consequence of
not paying might be that Zale would repossess the
ring. Zale might not be able to enforce Cox’s
agreement to pay it $219, but it could enforce
its security interest, which the order of
discharge had not touched.
In these circumstances, as Pertuso holds, the
inference that continued payment is voluntary,
having only to do with the debtor’s desire to
retain his property and nothing to do with an
unenforceable promise to pay, is compelling.
Advised by counsel, Cox obtained the deal with
Zale that he wanted: keep the ring, but keep
paying for it, since otherwise Zale could
repossess it. This implies that the stakes in
this case are negative--that Cox would be worse
off if he won than if he lost--since if he can
get his $219 back, Zale can get the ring back,
together with the rental value of the ring during
the period since Zale, by signing the debt-
reaffirmation agreement, forwent its right to
repossess it. So Cox’s suit for rescission is,
not unusually when a class action is in the
offing, both a frivolous suit and a nuisance
suit--frivolous because the payments that Cox
seeks to recoup were made voluntarily, a nuisance
suit because its net expected value to Cox is
negative. The purpose of the suit is to lay the
groundwork for a frivolous, nuisance class
action.
In the unlikely event that Zale really has
committed a deliberate, indeed a flagrant, breach
of the filing requirement (unlikely because, the
bankruptcy court lacking power to void a debt-
reaffirmation agreement when the debtor is
represented by counsel, Zale would have no
incentive not to file the agreement), Cox could
ask the bankruptcy court to hold Zale in contempt

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of the discharge order, which the statute makes
an injunction. In such a proceeding he could
obtain not only restitution of the payments he
made (as in a suit for rescission), assuming they
were involuntary, but also a reasonable
attorney’s fee to enable so small a claim to be
litigated. These are standard remedies in cases
of civil contempt. United States v. United Mine
Workers of America, 330 U.S. 258, 303-04 (1947);
In re General Motors, 61 F.3d 256, 259 (4th Cir.
1995) (per curiam); South Suburban Housing Center
v. Berry, 186 F.3d 851, 854-55 (7th Cir. 1999);
BPS Guard Services Inc. v. International Union of
Plant Guard Workers, 45 F.3d 205, 211 (7th Cir.
1995); Bessette v. Avco Financial Services,
supra, 230 F.3d at 445; 1 Dan B. Dobbs, Dobbs Law
of Remedies: Damages-Equity-Restitution sec.
2.8(2), pp. 194-95 (2d ed. 1993). The victim of a
violation of the statutory injunction might even
be able to obtain punitive damages, though
presumably only if he could prove criminal
contempt, In re General Motors, supra, 61 F.3d at
259; In re Power Recovery Systems, Inc., 950 F.2d
798, 802 (1st Cir. 1991); but see Bessette v.
Avco Financial Services, supra, 230 F.3d at 445,
since punishment is the purpose of criminal but
not of civil contempt.
The remedy authorized by section 524(a)(2) has
the advantage of placing responsibility for
enforcing the discharge order in the court that
issued it. That makes more sense than a suit
seeking more limited relief (a suit for
rescission would not entitle the successful
plaintiff to attorneys’ fees or punitive damages,
Estate of Jones v. Kvamme, 449 N.W.2d 428, 432
(Minn. 1989); 2 Dobbs, supra, sec. 9.4, pp. 613-
14), which could be filed in any federal district
in which Cox could serve Zale. The court that
issued the discharge order is in a better
position to adjudicate the alleged violation,
assess its gravity, and on the basis of that
assessment formulate a proper remedy. In the
context of debt-reaffirmation agreements the
rescission remedy is, for the reasons we’ve
explained, hokey.
Cox points out that an interpretation of the
Bankruptcy Code that makes contempt the sole
remedy for violation of the requirement that
debt-reaffirmation agreements be filed precludes
class-action relief, since the other debtors
whose debt-reaffirmation agreements Zale failed
to file with the bankruptcy court in which the
debtor’s bankruptcy was pending are scattered all
over the country. Cox argues that given the small
size of the debts and hence the small stakes in
individual actions, only class-action treatment
can assure adequate relief. Maybe so. But if
really engaged in a nationwide scheme of flouting

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discharge orders Zale can readily be humbled in a
proceeding for criminal contempt, with the
unlimited monetary sanctions that are available
for such contempts when grave. Granted, it is
unsettled whether bankruptcy judges have
criminal-contempt powers. Compare In re Ragar, 3
F.3d 1174 (8th Cir. 1993), with In re Hipp, 895
F.2d 1503, 1515-16 (5th Cir. 1990). Their power
to determine civil contempt is explicitly
conferred by Fed. R. Bankr. 9020(b); see also 11
U.S.C. sec. 105; In re Power Recovery Systems,
Inc., supra, 950 F.2d at 802; In re Rainbow
Magazine, Inc., 77 F.3d 278, 284-85 (9th Cir.
1996); In re Skinner, 917 F.2d 444, 447-48 (10th
Cir. 1990) (per curiam), but there is no
corresponding grant of power to determine
criminal contempt. It is true that 362(h) of the
Bankruptcy Code expressly authorizes an award of
punitive damages for the willful violation of the
statutory injunction created by section 362 (the
automatic stay), and it has been assumed that
bankruptcy judges can enforce that subsection as
well as the rest of section 362. In re Knaus, 889
F.2d 773, 775-76 (8th Cir. 1989); Budget Service
Co. v. Better Homes of Virginia, Inc., 804 289,
292 (4th Cir. 1986). Since punitive damages are--
punitive, and it is punitive purpose that
distinguishes criminal from civil contempt,
section 362(h) implies that bankruptcy judges do
have some criminal contempt power; but there is
no corresponding grant of power in section 524
and the omission may have been deliberate. We can
save the issue of the bankruptcy judges’
criminal-contempt powers for another day,
however. It is peripheral to the issue of the
adequacy of criminal contempt as a remedy for
violations of that section, since the district
court, the court with primary jurisdiction in
bankruptcy as we noted, can hold a party in
criminal contempt for violating a statutory
injunction. United States v. Guariglia, 962 F.2d
160, 162-63 (2d Cir. 1992).
We conclude, agreeing with Pertuso though
without endorsing its analysis of private rights
of action, that a suit for violation of section
524(c) can be brought only as a contempt action
under section 524(a)(2). But recurring to our
hypothetical case in which Zale sues Cox under
the debt-reaffirmation agreement because Cox
stops paying before the debt is paid off
completely, we remind that in such a case the
debtor can interpose section 524(c) as a defense
to the suit as an alternative to seeking a
contempt sanction in the bankruptcy court that
issued him his discharge. If all he wants is to
be left alone, and all the court in which Zale
sues has to decide is whether the agreement was
filed in the bankruptcy court, we cannot see any
statutory or other objection to his being allowed

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to elect that remedy. But once he has paid the
debt in full and is not in jeopardy of being
sued, affirmative relief can be sought only in
the bankruptcy court that issued the discharge.
In such a case the proper procedure would indeed
be to reopen the bankruptcy proceeding, since the
debtor would be seeking to enforce the order of
discharge issued in that proceeding. A court
retains jurisdiction to enforce its injunctions.
Affirmed.

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