Courts seem headed toward a rule allowing an individual bankrupt to sue for an alleged stay violation despite an arbitration clause, although an arbitration clause will be enforced if the same debtor initiates a class action.
A chapter 7 debtor filed a class action against a retailer for attempting to collect a discharged debt. She sought damages and attorneys’ fees under Section 362(k) of the Bankruptcy Code.
After Bankruptcy Judge Randall L. Dunn of Portland, Ore., recommended withdrawing the reference, District Judge Michael H. Simon held a hearing, took evidence, and decided on Jan. 22 that the arbitration clause was enforceable outside of bankruptcy. He then held that the result was the same in bankruptcy because the debtor was pursuing a class action.
Attempting to defeat invocation of the Federal Arbitration Act and its policy of rigorous enforcement of arbitration clauses, the debtor argued that requiring individual enforcement of claims for stay violations would conflict “with the underlying purpose of the Bankruptcy Code” because “individual arbitration is not economically viable.”
Judge Simon read the Ninth Circuit’s Schwartz-Tallard decision in 2015 as meaning that Congress intended to permit suits by individual debtors for their own benefit. The appeals court, according to Judge Simon, perceived a difference between core and non-core proceedings. He said that courts do not have discretion to compel arbitration in core proceedings because it “would inherently conflict with the underlying purposes of the Bankruptcy Code.”
Enforcing the arbitration clause and dismissing the class action, Judge Simon also found guidance from the Second’s Circuit’s 2006 decision in MBNA Am. Bank v. Hill and held that filing a class action is an admission that the claim was “not integral to her bankruptcy.”
Judge Simon’s opinion is similar in result to Belton v. GE Capital Consumer Lending Inc., where District Judge Vincent L. Briccetti of White Plains, N.Y., enforced an arbitration clause and dismissed a class action alleging violation of a discharge injunction.