Less than one year apart, two district judges in the Southern District of New York disagreed on a credit card lender’s right to compel arbitration in a class action alleging violations of the discharge injunction.
District Judge Nelson S. Román of White Plains, N.Y., wrote an opinion on June 14 upholding a decision by Bankruptcy Judge Robert Drain denying arbitration in a class action. In October, District Judge Vincent L. Briccetti reached the opposite result, compelling arbitration in a similar suit against a different credit card issuer.
In Judge Román’s case, an individual got a chapter 7 discharge covering credit card debt. Despite the discharge, the credit card lender continued reporting the debt as charged off rather than discharged in bankruptcy. The debtor filed a class action in bankruptcy court alleging that the failure to report the debt as discharged violated the discharge injunction under Section 524 of the Bankruptcy Code.
The lender filed a motion to compel arbitration, relying on a provision in the credit card agreement calling for arbitration of “any controversy.” Bankruptcy Judge Drain denied the motion to compel arbitration in May 2015, and the lender took a direct appeal.
Judge Román upheld denial of the motion to compel arbitration, interpreting the Second Circuit’s 2006 decision in MBNA America Bank v. Hill as controlling authority.
“We are especially gratified that the district judge focused on the discharge injunction, the policies behind it and how it affects the fresh start,” Adam Shaw from Boies, Schiller & Flexner LLP, counsel for the plaintiff, told ABI in a phone interview.
For a bankruptcy judge to have discretion to “override an arbitration agreement,” the lawsuit must be a core proceeding based on provisions of the Bankruptcy Code that “inherently conflict” with the Federal Arbitration Act, Judge Román said. Or, the bankruptcy court has discretion in a core proceeding if arbitration would “necessarily jeopardize” the objectives of the Bankruptcy Code.
Judge Román said that the lawsuit was core, even though it was a class action, because “discharge is clearly a right created by federal bankruptcy law” and all class members were bankrupts. He next held that arbitrating claims under Section 524 “would necessarily jeopardize the objectives of the Bankruptcy Code.”
Judge Román then analyzed Hill, where the Second Circuit compelled arbitration in a class suit alleging a violation of the automatic stay when the debtor had received a discharge, the case had been closed, and the automatic stay was no longer in effect. He distinguished Hill because the case before him involved the discharge injunction, which is the “central purpose” of bankruptcy and remains in effect “even after the conclusion of the bankruptcy proceedings.”
“[A]rbitration of a discharge violation would jeopardize this central objective,” Judge Román said.
To the Hill analysis, Judge Román added a fourth consideration: uniformity. He said that the need for uniformity was “compelling” because there could be “wildly inconsistent” results in arbitration.
In the case decided in October called Belton v. GE Capital Consumer Lending Inc. (In re Belton), Judge Briccetti reached the opposite result, also interpreting Hill. To read ABI’s discussion of Belton, click here.
Judge Briccetti denied a motion in Belton for leave to appeal to the Second Circuit. The Second Circuit in turn denied a motion for leave to appeal in March. In April, the plaintiff filed a mandamus petition in the Second Circuit.
Boise Schiller is representing the plaintiffs in both cases.