A district court in Minnesota ruled that a debtor is not required to arbitrate when the debtor sues the creditor for violating the automatic stay and discharge injunction. However, the January 13 opinion does not completely close the door to arbitration when the debtor sues for something other than a stay or discharge violation.

The debtor was in payment breach of a contract with a provider of services. The contract called for arbitration of disputes.

The creditor received notice of the chapter 7 filing and, later, a separate notice of discharge. In multiple phone calls and written communications, the creditor demanded payment both before and after discharge. In writing and with calls and messages, the debtor and the debtor’s counsel on several occasions informed the creditor about the automatic stay and the discharge.

For violating the injunctions, the debtor sued the creditor in district court, seeking actual and punitive damages, plus attorneys’ fees.

The creditor responded to the complaint with a motion to compel arbitration. District Judge Katherine Menendez of Minneapolis denied the arbitration motion.

Judge Menendez began analysis of the merits by reciting the usual mantra that “[f]ederal law has a general policy favoring arbitration.” However, “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,’” Judge Menendez said, quoting the Eighth Circuit.

To compel arbitration, Judge Menendez said there must be an agreement to arbitrate, and the dispute must be within the scope of the arbitration agreement.

Quoting the Eighth Circuit Bankruptcy Appellate Panel, Judge Menendez said that “‘a discharge in a Chapter 7 case discharges the debtor from all debts that arose before the date of filing of the bankruptcy petition, except those that are excepted from discharge.’” A reaffirmation agreement, she said, is the only vehicle for a debt to survive discharge.

“Several courts,” Judge Menendez said, “have held that, absent a reaffirmation agreement between the debtor and the creditor, an arbitration agreement embedded in a contract terminated by a bankruptcy discharge is unenforceable.”

Judge Menendez said that the debtor had agreed “to arbitrate disputes arising out of the parties’ contracts, but the bankruptcy discharge terminated [the debtor’s] obligations under the contracts by eliminating his debt to [the creditor].”

In the complaint, Judge Menendez said that the debtor was not seeking “to use that agreement as a weapon to obtain anything from [the creditor] while simultaneously trying to avoid the effect of an arbitration clause.”

“Instead,” Judge Menendez said, the debtor “seeks compensation based on [the creditor’s] allegedly unlawful attempts to collect on a debt after it was discharged.”

Before denying the arbitration motion, Judge Menendez said it was “true” that “a bankruptcy discharge does not render an arbitration agreement unenforceable, but most have done so in other contexts, where the debtor’s claims did not arise out of the creditor’s attempts to collect on a discharged debt.” She cited three cases where a debtor was required to arbitrate suits against a creditor alleging violations of the federal Fair Credit Reporting Act.

Observation

The opinion does not deal with whether, as some courts have held, the bankruptcy court in which the case was filed has exclusive jurisdiction regarding claims for violation of the automatic stay or discharge injunction.