The Second Circuit is primed to resolve a split among the districts courts in the Southern District of New York by deciding whether an arbitration agreement is enforceable when a bankrupt mounts a class action claiming that a creditor violated the discharge injunction.
In Credit One Financial v. Anderson (In re Anderson), 16-2496 (2d Cir.), the last brief was filed this month, but oral argument has not been set. In Anderson, District Judge Nelson S. Román upheld Bankruptcy Judge Robert Drain, refused to enforce an arbitration agreement, and allowed the class action to proceed in bankruptcy court.
In an opinion on March 3, Bankruptcy Judge Erik P. Kimball of West Palm Beach, Fla., disagreed with Anderson, while concluding that Belton v. GE Capital Consumer Lending Inc., 15-cv-1934, 2016 BL 8541 (S.D.N.Y. Jan. 12, 2016), “is better aligned with the federal policy favoring arbitration.”
Handing down his opinion six months before Anderson, District Judge Vincent L. Briccetti in New York enforced an arbitration agreement in Belton and halted a class action alleging violation of the discharge injunction. In Belton, the district judge did not allow an interlocutory appeal, forcing the parties to arbitrate.
Notably, Bankruptcy Judge Robert Drain was also the author of the lower court opinion that Judge Briccetti reversed in Belton. In other words, Bankruptcy Judge Drain was reversed by one district judge and upheld by another on precisely the same issue.
The facts in Judge Kimball’s new case were little different.
The debtor got her chapter 7 discharge, only to face collection efforts on a student loan. The debtor contended that her so-called bar study loan was not a “qualified education loan” and was therefore not excepted from discharge under Section 523(a)(8). Because study loans are designed to pay recent graduates’ living expenses while they prepare for the bar examination, debtors have achieved some success on similar theories.
The debtor reopened her bankruptcy and filed a class action on behalf of similarly situated debtors in Florida. The lender responded with a motion to dismiss and compel individual arbitration of the debtor’s discharge violation claim.
The lender won. Judge Kimball granted the arbitration motion, compelled individual arbitration of the discharge violation claim, closed the adversary proceeding, and reclosed the chapter 7 case.
Judge Kimball stated the governing law in the same terms as the courts in New York: The court must enforce an arbitration agreement if the issues are “core.” He determined that interpretation of a chapter 7 discharge and enforcement of a discharge injunction are both core.
For core proceedings, the court can override an arbitration agreement if arbitration inherently conflicts with the underlying purposes of the affected provisions in the Bankruptcy Code.
Siding with District Judge Briccetti, Judge Kimball found no inherent conflict because the debtor’s bankruptcy case had been closed, thus precluding any interference with distribution of the estate or an ongoing reorganization. He also said that the “putative class action case weighs in favor of compelling arbitration.”
In addition, Judge Kimball was swayed by the fact that the bankruptcy court does not have exclusive jurisdiction to determine whether claims of that type are excepted from discharge.
Like Belton, Judge Kimball did not indicate whether he would have been more inclined to override the arbitration agreement if the debtor were only suing on her own behalf.
To read ABI’s discussion of Anderson, click here. For the story on Belton, click here.
The opinion is Williams v. Navient Solutions LLC (In re Williams), 16-01244 (S.D.Fla. March 3, 2017).