Proceedings for contempt of the discharge injunction were not within the scope of an arbitration agreement, according to bankruptcy and district judges in Tampa, Florida.
A chapter 7 debtor scheduled a cell phone provider’s $500 claim and later received a general discharge. The creditor never appeared in the bankruptcy case and did not challenge the debtor’s discharge.
Five months after discharge, the creditor sent the debtor a letter demanding payment of the debt. The debtor responded with proceedings to hold the creditor in contempt of the discharge injunction.
Citing a broadly worded arbitration clause in the customer agreement with the debtor, the creditor moved to compel arbitration of the contempt allegations.
Bankruptcy Judge Roberta C. Colton of Tampa denied the arbitration motion.
The creditor appealed, but District Judge Steven C. Merryday of Tampa upheld Judge Colton for two independent reasons.
In his three-page opinion on September 24, Judge Merryday first ruled that the contempt proceedings were not within the scope of the arbitration agreement.
Judge Merryday said that the creditor “must establish that the parties agreed to arbitrate the dispute.” There was no dispute, he said, that the debt was discharged.
The debtor, Judge Merryday said, was claiming that the creditor violated the discharge injunction and was not alleging a violation of the customer agreement. Thus, he ruled that the contempt proceedings were not within the scope of the arbitration agreement because the allegations did not relate to or arise from the customer agreement.
The powers of the bankruptcy court provided the second reason for deciding that the contempt proceedings were not arbitrable.
Judge Merryday said that the bankruptcy court “retains the inherent power to enforce an order.” He cited Eleventh Circuit authority for the principle that contempt proceedings are an action of the court, although begun by a party.
Judge Merryday held that the customer agreement could not “deprive the bankruptcy court of the inherent power to enforce compliance with an injunction, the issuance of which was lawful, uncontested, and binding.”
Observations
The customer agreement in the case on appeal evidently did not call for arbitrators to determine whether a particular dispute was within the scope of the arbitration agreement. If the agreement had called for arbitrators to rule on whether a dispute was arbitrable, Judge Merryday would have confronted an issue decided last term by the Supreme Court in Henry Schein Inc. v. Archer & White Sales Inc., 139 S. Ct. 524, 202 L. Ed. 2d 480 (Sup. Ct. Jan. 8, 2019).
In Henry Schein, the high court reiterated and expanded the notion that arbitrators have the exclusive right to determine whether a dispute is within the scope of the arbitration agreement if the agreement submits the issue to the arbitrators.
Is Henry Schein applicable to bankruptcy cases and to contempt proceedings in particular? If the customer agreement called for arbitrators to decide whether a dispute was subject to arbitration, would Judge Merryday have been required to submit the arbitrability issue to arbitration?
Or, are disputes that arise in bankruptcy cases generally exempt from arbitration? And if there is an exemption from arbitration, does it apply only to “core” proceedings?
We raise these issues because the Supreme Court in recent terms has become increasingly emphatic about compelling arbitration while finding fewer loopholes to avoid arbitration.
Shearson, Epic and Schein
In 1987, the Supreme Court ruled that a court could decline to enforce an arbitration agreement if there was an inherent conflict between arbitration and the statute’s underlying purpose. Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 227 (1987).
Building on McMahon, the Second, Fourth, Fifth and Ninth Circuits have held in bankruptcy cases that the court may decline to compel arbitration if the issue is “core” and arbitration would represent a “severe conflict” with the Bankruptcy Code.
Last year, the Second Circuit utilized that concept to override an arbitration agreement when a debtor mounted a class action contending that the creditor had violated the discharge injunction. One Bank NA v. Anderson (In re Anderson), 884 F.3d 382 (2d Cir. March 7, 2018), cert. denied Oct. 1, 2018.
Anderson and the other circuit decisions overriding arbitration agreements in bankruptcy cases were all decided before Epic Systems Corp. v. Lewis, 138 S. Ct. 1612, 1624 (May 21, 2018), where the Supreme Court held that the language of a statute must be “clear and manifest” before a court can disregard an arbitration agreement. In Epic, the Supreme Court nixed a class action and required individual arbitration of a former employee’s claim that the employer’s failure to pay overtime violated the Fair Labor Standards Act.
Epic was a 5/4 decision, with the justices divided on ideological grounds.
Applying Epic and Schein to Bankruptcy Cases
Assume that a debtor and a creditor had a prebankruptcy agreement to arbitrate all disputes, including any arising in bankruptcy, such as the allowance of claims, counterclaims, preferences, adequate protection, dischargeability and contempt. Further assume that the agreement calls for the arbitrator to decide whether the dispute is arbitrable, even following bankruptcy.
If Epic and Schein were applied rigorously and without exception, a bankruptcy judge arguably would have no right to bar the creditor from initiating arbitration, even if the dispute raised a core issue such as the allowance of a claim, dischargeability, adequate protection or contempt of the discharge injunction.
Will the Supreme Court eventually rule that the Bankruptcy Code evidences a “clear and manifest” exception to the rule that federal courts must enforce arbitration agreements? Or will the justices lay down a separate rule for deciding when a bankruptcy court must compel arbitration?
If Epic and Schein apply in bankruptcy, consumer debtors will be arbitrating the allowance of claims and dischargeability, and chapter 11 debtors will be defending or prosecuting defending dozens of arbitrations. Bankruptcy will have less efficacy for debtors if arbitration agreements are generally enforceable.
Proceedings for contempt of the discharge injunction were not within the scope of an arbitration agreement, according to bankruptcy and district judges in Tampa, Florida.
A chapter 7 debtor scheduled a cell phone provider’s $500 claim and later received a general discharge. The creditor never appeared in the bankruptcy case and did not challenge the debtor’s discharge.
Five months after discharge, the creditor sent the debtor a letter demanding payment of the debt. The debtor responded with proceedings to hold the creditor in contempt of the discharge injunction.
Citing a broadly worded arbitration clause in the customer agreement with the debtor, the creditor moved to compel arbitration of the contempt allegations.
Bankruptcy Judge Roberta C. Colton of Tampa denied the arbitration motion.
The creditor appealed, but District Judge Steven C. Merryday of Tampa upheld Judge Colton for two independent reasons.