By: Donald L Swanson
Since Debtor “does not now seek to use that agreement as a weapon” against Creditor, Debtor’s “bankruptcy discharge renders the arbitration agreement unenforceable.”
- Rogne v. Digital Forensics Corp., Case No. 24-cv-2612 (D. Minn. 1/13/2025; Doc. 22, at 7) (emphasis added).
Facts
Debtor gets a Chapter 7 discharge.
But Creditor keeps trying to collect on the discharged debt—with knowledge of the discharge order.
So, Debtor sues Creditor, asserting these claims:
- Count I—Bankruptcy Automatic Stay Violation — 11 U.S.C § 362;
- Count II—Bankruptcy Discharge Injunction Violation — 11 U.S.C. § 524; and
- Count III—Invasion of Privacy – Intrusion Upon Seclusion.
Creditor counters with a Motion to compel arbitration and to dismiss the lawsuit, based on an arbitration clause in the contract between Debtor and Creditor.
Such Motion is denied by the District Court (id.). Here is the denial rationale.
Arbitration Law
Arbitration is fundamentally a matter of contract law, and parties cannot be forced to arbitrate “unless they have contractually agreed to be bound by arbitration.”
When determining whether to compel arbitration, courts consider: (1) whether the parties agreed to arbitrate, and if so, (2) whether the dispute is within the scope of the agreement. In doing so, courts apply ordinary state-law principles that govern the formation of contracts.
The party seeking to compel arbitration has the burden to prove that a “valid and enforceable agreement” to arbitrate exists,
Bankruptcy Law
A Chapter 7 bankruptcy allows debtors to get a “fresh start” by discharging their debts.
The discharge injunction operates as an injunction against actions to collect on a debt, unless the discharge of a particular debt is waived.
The discharge injunction ensures that debtor will not be pressured in any way to repay a discharged debt, by eliminating the claim to payment.
A reaffirmation agreement is the only way a dischargeable debt can survive a Chapter 7 discharge.
Courts have held that, absent a reaffirmation agreement, an arbitration agreement embedded in a contract is unenforceable after a bankruptcy discharge.
Weaponization
When a debtor’s post-discharge claims against a creditor are not being used “as a weapon,” the debtor cannot be compelled to arbitrate a claim under the discharged contract.
What weaponization means is this:
- if a debtor wants to do more with a discharged contract than to merely enforce the discharge injunction, then an arbitration clause in that contract can be enforced.
Here are three examples, cited in footnote 4 of the Rogne v. Digital opinion, of the weaponization of a discharged contract for which an arbitration clause can still be enforced.
- In Mann v. Equifax Information Services, LLC, Case No. 12-cv-14097 (E.D. Mich. 7/22/2013), a discharged debtor sues a creditor for both negligent and willful violations of the Fair Credit Reporting Act. Their contract contains an arbitration clause. The Court holds that, (i) Debtor’s lawsuit has nothing to do with enforcing the discharge injunction, and (ii) so, the arbitration clause is enforceable.
- In Gadomski v. Wells Fargo Bank N.A., 281 F. Supp. 3d 1015 (E.D. Cal. 2018), the discharged debtor sues creditor under the Fair Credit Reporting Act and California’s Consumer Credit Reporting Agencies Act, because creditor is reporting debtor’s discharged claim as “charged off” (which implies an active delinquency), rather than as “discharged in bankruptcy” (which means no debt is owed). The Court holds that, since Debtor’s claims go beyond enforcing the discharge injunction, the arbitration clause is enforceable.
- In Chavez v. Get It Now, LLC, Case No. 17-1490 (D. Minn. 1/16/2018), the Court holds that (i) arbitration clauses are enforceable, despite a bankruptcy discharge, “as long as the debtor’s claims do not arise from the creditor’s attempts to collect the discharged debt,” (ii) that’s because “attempting to collect discharged debt elevates the creditor-debtor dispute and conflicts with the Bankruptcy Code’s purpose of giving debtors a fresh start,” and (iii) arbitrating § 524 discharge claims “would necessarily jeopardize the objectives of the Bankruptcy Code.”
Debtor’s Details
In Debtor’s Complaint against Creditor, no attempt is made at weaponizing the discharged contract. The claims asserted in the Complaint relate exclusively to Creditor’s post-discharge collection efforts.
Specifically, under Debtor’s Complaint:
- Debtor agreed to pay Creditor for pre-petition service and to arbitrate any dispute arising out of that contract;
- Debtor’s bankruptcy discharge terminated Debtor’s obligations under the contract by eliminating Debtor’s debt to Creditor; and
- Debtor does not seek any relief beyond enforcing the discharge injunction.
Conclusion
Accordingly, the Court rules that, since Debtor is not using the contract with Creditor as a weapon, the arbitration clause in Debtor’s contract with Creditor is unenforceable, as to the claims in Debtor’s complaint.
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