Recent decisions by the Supreme Court did not change the law and do not require bankruptcy courts to compel arbitration of core issues, the Fifth Circuit said.
More particularly, the appeals court ruled on October 17 that the bankruptcy court had discretion not to enforce an arbitration agreement when a debtor initiated a class action contending that a creditor had violated the discharge injunction. The Fifth Circuit thus lines up with One Bank NA v. Anderson (In re Anderson), 884 F.3d 382 (2d Cir. March 7, 2018), cert. denied, One Bank NA v. Anderson 139 S. Ct. 144, 202 L. Ed. 2d 35 (Oct. 1, 2018), where the Second Circuit decided that arbitration was not required when the debtor mounted a class suit in bankruptcy court alleging a violation of the discharge injunction. For ABI’s discussion of Anderson, click here.
Simple Facts
The debtor confirmed a chapter 13 plan in 2013 and received a discharge in 2018. The student loan lender had filed a proof of claim and had received payments under the plan.
After discharge, the debtor received letters from the student loan lender. The debtor filed a class action in bankruptcy court contending that the communications were an attempt at collecting a debt in violation of the discharge injunction.
The lender responded with a motion to compel arbitration, relying on a provision in the loan agreement requiring arbitration of any dispute “arising out of or related to” the debt. Bankruptcy Judge David R. Jones of Houston denied the motion, relying in large part on In re National Gypsum Co., 118 F.3d 1059 (5th Cir. 1997).
The lender appealed, arguing that the Fifth Circuit’s National Gypsum opinion is no longer good law in view of more recent authority from the Supreme Court. The Fifth Circuit accepted a direct appeal.
The Supreme Court on Arbitration
In recent years, the Supreme Court has become more strident in requiring enforcement of arbitration agreements. Historically, however, the Supreme Court seemed to have been more lenient.
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 a statute’s underlying purpose. Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 227 (1987).
Latching onto 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.
Interpreting McMahon, the Fifth Circuit in National Gypsum and the Second Circuit in Anderson both decided that the bankruptcy court may decline to enforce arbitration when the debtor alleges a violation of the discharge junction.
National Gypsum, 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.
The term after Epic, the Supreme Court was even more emphatic is deciding Henry Schein Inc. v. Archer & White Sales Inc., 139 S. Ct. 524, 202 L. Ed. 2d 480 (Sup. Ct. Jan. 8, 2019). There, 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.
Even if the argument for arbitration is “wholly groundless,” Henry Schein says that federal courts must allow the arbitrators to decide whether the dispute is within the scope of the arbitration agreement. In other words, the federal court may only decide whether there is an enforceable arbitration agreement. If there is, arbitrators will decide whether the particular issue is within the scope of arbitration.
The Fifth Circuit’s Analysis
In the Fifth Circuit, the lender conceded that the case was properly decided under National Gypsum. The lender nonetheless contended that National Gypsum is no longer good law in view of Epic.
The Fifth Circuit panel consisted of Circuit Judges Carolyn Dineen King, Stephen A. Higginson, and Stuart K. Duncan. To depart from the mandate of National Gypsum, the panel said in its per curiam opinion that authority from the Supreme Court must be “unequivocally direct and controlling.” Possibly contrary high court authority does not allow a three-judge panel to overrule prior circuit precedent if the Supreme Court opinion is “merely illuminating.”
To disregard an arbitration agreement, National Gypsum said that the proceeding must adjudicate a statutory right conferred by the Bankruptcy Code. Second, the court may override an arbitration agreement only if arbitration would conflict with a purpose of the Bankruptcy Code, such as the centrality of administration.
The panel said that McMahon, National Gypsum’s “doctrinal foundation, “remains sound.” Epic and McMahon, the panel said, employ “substantially” the “same test,” even though Epic evidences a “different tone.” The panel concluded that the difference between a “deducible” congressional intent and a “clear and manifest” intent “is not an unequivocal direction to overrule our precedent.”
Holding that National Gypsum remains good law following Epic, the panel affirmed the bankruptcy court’s exercise of discretion not to compel arbitration of an alleged violation of the discharge injunction.
Is ‘Cert’ in the Making?
Although per curiam, the Fifth Circuit’s panel opinion is precedential. However, there is no clear-cut circuit split because the Fifth and Second Circuits are on the same page.
The lender, however, may file a motion asking the Fifth Circuit to sit en banc. If the appeals court hears the case en banc and overrules National Gypsum, there then will be a split with the Second Circuit’s Anderson decision, providing the foundation for an attractive certiorari petition.
In other words, we are several steps away from a case for the Supreme Court to decide whether a creditor may compel arbitration over “core” bankruptcy issues.
Recent decisions by the Supreme Court did not change the law and do not require bankruptcy courts to compel arbitration of core issues, the Fifth Circuit said in a per curiam opinion.
More particularly, the appeals court ruled on October 17 that the bankruptcy court had discretion not to enforce an arbitration agreement when a debtor initiated a class action contending that a creditor had violated the discharge injunction. The Fifth Circuit thus lines up with One Bank NA v. Anderson (In re Anderson), 884 F.3d 382 (2d Cir. March 7, 2018), cert. denied, One Bank NA v. Anderson 139 S. Ct. 144, 202 L. Ed. 2d 35 (Oct. 1, 2018), where the Second Circuit decided that arbitration was not required when the debtor mounted a class suit in bankruptcy court alleging a violation of the discharge injunction. For ABI’s discussion of Anderson, click here.
Simple Facts
The debtor confirmed a chapter 13 plan in 2013 and received a discharge in 2018. The student loan lender had filed a proof of claim and had received payments under the plan.
After discharge, the debtor received letters from the student loan lender. The debtor filed a class action in bankruptcy court contending that the communications were an attempt at collecting a debt in violation of the discharge injunction.
The lender responded with a motion to compel arbitration, relying on a provision in the loan agreement requiring arbitration of any dispute “arising out of or related to” the debt. Bankruptcy Judge David R. Jones of Houston denied the motion, relying in large part on In re National Gypsum Co., 118 F.3d 1059 (5th Cir. 1997).
The lender appealed, arguing that the Fifth Circuit’s National Gypsum opinion is no longer good law in view of more recent authority from the Supreme Court. The Fifth Circuit accepted a direct appeal.