Without deciding whether he would certify a class, Bankruptcy Judge Paul M. Black of Roanoke, Va., denied a motion to stay and compel arbitration of a class action adversary proceeding alleging violations of the automatic stay in consumer chapter 7 and 13 cases.

The named plaintiffs were individual debtors in chapters 7 and 13. After their credit card lender was notified about their bankruptcy filing, they allege that the lender sent them notices about the balances in their accounts. The plaintiffs sought declarations about violations of the automatic stay and injunctive relief, plus actual and punitive damages together with attorneys’ fees.

The credit card agreements contained arbitration clauses permitting the debtors to opt out. Neither plaintiff had opted out. The lender filed a motion to stay the suit and enforce the arbitration clause. The lender conceded that the claims were constitutionally core.

Addressing the merits, Judge Black lauded Bankruptcy Judge Michelle Harner of Baltimore for “succinctly describ[ing] the competing interests between the [Federal Arbitration Act] and the Bankruptcy Code, particularly as they pertain to efficiency and fairness.” In re McPherson, 630 B.R. 160, 166-167 (Bankr. D. Md. 2021). To read ABI’s report on McPherson, click here.

Judge Black said that the Supreme Court “set[] the standard for resolving such competing interests” by saying that the FAA’s “‘mandate may be overridden by a contrary congressional command.’” Shearson/American Exp., Inc. v. McMahon, 482 U.S. 220, 226 (1987).

Judge Black cited the Fourth Circuit in interpreting McMahon for instructing “lower courts to examine whether that intent can be gleaned from (1) the statute’s text, (2) its legislative history, or (3) ‘an inherent conflict between arbitration and the statute’s underlying purposes.’” Moses v. CashCall Inc., 781 F.3d 63, 71 (4th Cir. 2015) (quoting McMahon, 482 U.S. at 227).

“Significantly,” Judge Black said, the Fourth Circuit said that intent can be deduced by the trial court as a matter of discretion to be reviewed for abuse of discretion. In the case at hand, he said that the focus was on deciding whether there was “an inherent conflict . . . between the FAA and the Bankruptcy Code provision at play here.”

Judge Black found the answer quickly in CashCall, where the Fourth Circuit said that arbitrating a constitutionally core claim “‘would inherently conflict with the purposes of the Bankruptcy Code.’ CashCall at 73.” In addition to having a constitutionally core claim, he said that the plaintiff was seeking “remedies for violations of the automatic stay and relief incidental” to Section 362(k)(1).

To counter CashCall, the lender relied on MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104 (2d Cir. 2006).

Hill is not only “at variance with Fourth Circuit precedent in CashCall,” Judge Black said, “but its primary argument also misapprehends the reality of consumer bankruptcies in particular,” by which he meant that consumer debtors “have very limited resources.”

“Centralizing the resolution of disputes before the bankruptcy court,” Judge Black said, “enables the debtors to preserve those limited resources.” Thus, he concluded that “maintaining the claims in this case before this Court is more consistent with the goals of the Bankruptcy Code than of the FAA.”

In addition, Judge Black said there were “[l]arger systemic issues . . . at play here,” because “multiple debtors [were] being pursued for payment post-filing in violation of the automatic stay in each of their cases.”

Leaving open the question of certifying a class, Judge Black denied the arbitration motion, quoting a bankruptcy court from Mississippi, which said that an “arbitrator cannot be allowed to take the role of protector of the judicial process when he or she is outside the system and is an alternative to the system.” In re Grant, 281 B.R. 721, 725 (Bankr. S.D. Ala. 2000).