Reaching the same result as the Second Circuit in March, Bankruptcy Judge Roberta A. Colton of Tampa, Fla., refused to enforce an arbitration agreement to bar a class action alleging violation of the Section 524 discharge injunction.
Whether Judge Colton’s decision will hold up to appellate scrutiny is in doubt because she issued her opinion on May 21, the same day the Supreme Court handed down Epic Systems v. Lewis, 16-285, 2018 BL 178768, 86 U.S.L.W. 4297, 2018 U.S. Lexis 3086, 2018 WL 2292444 (U.S. May 21, 2018), where the high court ruled that employees can be compelled to arbitrate alleged violations of federal labor law.
The Case in Tampa
Similar to the case in the Second Circuit, a debtor in Tampa had filed a class action in bankruptcy court against a cell phone provider seeking contempt sanctions for violating the discharge injunction by sending collection letters after the entry of discharge.
The cell phone provider responded with a motion to compel arbitration and stay the action in bankruptcy court. The customer agreement contained a broad arbitration clause covering “any dispute that in any way relates to or arises out of this agreement or from any . . . services you receive . . . .”
Judge Colton refused to compel arbitration. She employed the typical approach to enforcement of arbitration agreements, beginning with the strong federal policy in the Federal Arbitration Act favoring arbitration.
The debtor contended that the arbitration agreement along with the customer agreement were discharged and rendered unenforceable. Rejecting the argument, Judge Colton followed the line of authority holding that an arbitration clause survives even though the debt was discharged, because the arbitration clause was not a “claim” or a “debt.”
Did the Parties Agree to Arbitrate?
Having found there was a surviving agreement to arbitrate, Judge Colton analyzed whether the agreement was enforceable. With regard to enforceability generally, the Eleventh Circuit asks two questions, according to Judge Colton. First, did the parties actually agree to arbitrate, and second, are there any “legal constraints foreclosing arbitration,” such as bankruptcy?
In substance, the arbitration agreement failed both tests.
With regard to the first question, Judge Colton asked whether the parties agreed to arbitrate a violation of the discharge injunction. The answer lay in whether there was a significant relationship between the contempt motion and the customer agreement.
In that respect, Judge Colton said, there was no contractual nexus between the customer contract and the discharge violation, because the resolution of the contempt claim would not entail reference to or construction of the contract. Furthermore, she said there was no nexus to the contract because the contempt claim pertained to a breach of duty imposed by law. The debtor was alleging a violation of the discharge injunction, not a breach of the customer agreement. In short, the customer agreement bore “no relation to the issue of contempt,” Judge Colton said.
Of more significance, Judge Colton said that the “court has a significant interest in enforcing any injunction it issues, and this court has not agreed to arbitrate its contempt powers.” [Emphasis added.]
In summary, there was no agreement to arbitrate a discharge violation, for the several reasons given by Judge Colton.
The motion to compel arbitration similarly failed the second test: whether there are legal constraints to enforcing arbitration. The Eleventh and Second Circuits both hold that bankruptcy precludes arbitration if the bankruptcy proceeding is “core” and presents a “severe conflict” with the Bankruptcy Code.
On the issue of whether there is a “severe conflict,” Judge Colton said that the “Second Circuit answered this precise question with a resounding yes” in Anderson v. Credit One Bank N.A. (In re Anderson), 884 F.3d 382 (2d Cir. March 7, 2018).
Like the Second Circuit, Judge Colton went on to find “that a contempt proceeding for violation of the discharge injunction inherently conflicts with the Bankruptcy Code and undermines the bankruptcy court’s authority to enforce its orders and exercises [sic] its powers of contempt.”
Did the Supreme Court Undercut Judge Colton?
Although Judge Colton and the Second Circuit provide similar and solid arguments to override arbitration clauses in the context of discharge violations, their decisions must be analyzed in light of subsequent Supreme Court authority, namely, Epic Systems v. Lewis.
Superficially, Judge Colton’s case resembles the issue before the Supreme Court in Epic, because both involved alleged violations of federal law that the plaintiffs sought to address in a lawsuit. However, there are important differences that may permit different results.
In Epic, the employees were suing for a declaration that their terms of employment violated federal labor law. In that sense, the employees were challenging aspects of the contract containing the arbitration clause.
As Judge Colton took pains to explain, the debtor in her case was not contending that the customer agreement violated the discharge injunction. Likewise, Epic did not involve an attempt to arbitrate a court’s own injunction. Factual differences between Judge Colton’s case and Epic therefore might justify different results.
To read ABI’s report on Anderson, click here. As the ABI analysis says, Anderson arguably was a turnabout because the Second Circuit previously had upheld an arbitration agreement when a debtor filed a class action for violation of the automatic stay under Section 362.