In March 2018, the Second Circuit held that a debtor is not required to arbitrate a contempt action alleging that a creditor violated the discharge injunction. Credit One Bank NA v. Anderson (In re Anderson), 884 F.3d 382 (2d Cir. March 7, 2018), cert denied, 139 S. Ct. 144 (2018).
Two months later, the Supreme Court compelled employees to arbitrate wages and hours claims governed by the Fair Labor Standards Act. Epic Systems Corp. v. Lewis, 200 L. Ed. 2d 889 (Sup. Ct. May 21, 2018). Epic said that a statute like the FSLA did not manifest a clear intention to override the federal Arbitration Act.
Epic raised the following question: Does the Bankruptcy Code manifest a clear intention to override arbitration agreements, or does bankruptcy for some reason represent an exception to Epic’s exacting standard?
In an opinion on June 16, the Second Circuit rejected an appeal by lenders contending that Anderson is no longer good law after Epic. Still, the lenders may have won more than they lost, because the appeals court said in strongly worded dicta that the bankruptcy court may not maintain a nationwide class action to rectify violations of the discharge injunction.
New Appeal, Same Facts
Like Anderson, the facts before the Second Circuit were simple. Two lenders had charged off the debtors’ credit card debt before bankruptcy. After discharges in chapter 7, the lenders continued to report the debts as charged off rather than discharged.
The debtors asserted that failing to report the debts as discharged was an effort to coerce repayment. They reopened their bankruptcy cases and mounted a purported nationwide class action seeking a contempt citation and damages for violating the discharge injunction.
The bankruptcy court denied the lenders’ motion to enforce an arbitration clause in the credit card agreements, and the district court affirmed.
Circuit Judge Richard J. Sullivan upheld denial of the motion to compel arbitration, but probably killed off the class action.
The Second Circuit Revisits Anderson
Up front, Judge Sullivan said that Anderson was controlling and answered “this very question only two years ago.” However, the lenders argued that Epic undermined both Anderson and the Supreme Court authority on which it was based, Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987).
The better part of Judge Sullivan’s decision was therefore devoted to deciding whether Anderson was no longer good law after Epic established what he described as an “exacting gauntlet through which a party must run to demonstrate congressional intent to displace the Arbitration Act.”
Judge Sullivan quickly cited the Fifth Circuit for holding that Epic employed substantially the same test as McMahon. See Henry v. Educ. Fin. Serv. (In re Henry), 944 F.3d 587, 592 (5th Cir. 2019). Like Anderson, Henry allowed a class action over a discharge violation to proceed despite an arbitration clause. To read ABI’s report on Henry, click here.
“More to the point,” Judge Sullivan said, Epic didn’t say it was overruling or modifying McMahon. He interpreted Epic as a “reminder that a statute’s purpose cannot circumvent its text.” Furthermore, Epic “clearly viewed statutory silence as probative evidence that Congress did not intend to displace the Arbitration Act.”
Even though the Bankruptcy Code is silent regarding arbitration, Judge Sullivan said the omission was not “outcome determinative.” He therefore did “not think that the Code’s failure to expressly disclaim arbitrability undermines Anderson’s conclusion.”
Judge Sullivan conceded that the lenders had “one textual argument with some teeth”: State courts have concurrent jurisdiction to enforce discharge injunctions. Given that state courts are competent to decide discharge disputes, the lenders argued that arbitrators are, too.
Judge Sullivan disagreed. In state court, discharge is raised as a defense in debt collection, but the debtors were seeking damages for contempt of the discharge injunction in bankruptcy court, the only court with the right to grant that remedy.
Neither the text of the Bankruptcy Code nor the legislative history were helpful in divining the intent of Congress regarding contempt proceedings, Judge Sullivan said. He therefore upheld denial of the arbitration motion, reiterating “Anderson’s conclusion that the Code is in ‘inherent conflict’ with arbitration.”
Dicta on No Class Action
In deciding that the debtor was not obliged to arbitrate a discharge violation, Judge Sullivan said, “we have not endeavored to address whether a nationwide class action is a permissible vehicle for adjudicating thousands of contempt proceedings, and neither our decision today nor Anderson should be read as a tacit endorsement of such.”
In a nationwide class action, the bankruptcy court would be interpreting other judges’ discharge injunctions. Judge Sullivan found “severe tension” with the idea in Anderson that the bankruptcy court would be denying arbitration to interpret its own order. He therefore said, “It seems to us that this rationale is anathema to a nationwide class action.”
But he didn’t stop there. Judge Sullivan questioned whether one bankruptcy court would have jurisdiction to hold a creditor in contempt of another court’s order. “Most circuits that have considered the issue have rejected the notion,” he said.
Judge Sullivan affirmed the district court but remanded for further proceedings consistent with the opinion, presumably meaning that the lower courts should nix the nationwide class action.
What’s Left for Class Actions?
The Second Circuit all but held there can be no nationwide class action. Presumably, a bankruptcy judge could entertain a class suit for discharge violations occurring in cases before that judge.
Could a bankruptcy judge entertain a class suit for discharge violations affecting debtors before different judges in the same courthouse? Or before different judges in the same district?
The decision seems to remove the economic incentive for the plaintiffs’ bar to rectify discharge violations on a scale large enough to warrant the expense. All is not lost, however. Plaintiffs’ counsel may sometime be able to allege the same facts in a class suit under the Fair Debt Collection Practices Act.
In March 2018, the Second Circuit held that a debtor is not required to arbitrate a contempt action alleging that a creditor violated the discharge injunction. Credit One Bank NA v. Anderson (In re Anderson), 884 F.3d 382 (2d Cir. March 7, 2018), cert denied, 139 S. Ct. 144 (2018).
Two months later, the Supreme Court compelled employees to arbitrate wages and hours claims governed by the Fair Labor Standards Act. Epic Systems Corp. v. Lewis, 200 L. Ed. 2d 889 (Sup. Ct. May 21, 2018). Epic said that a statute like the FSLA did not manifest a clear intention to override the federal Arbitration Act.
Epic raised the following question: Does the Bankruptcy Code manifest a clear intention to override arbitration agreements, or does bankruptcy for some reason represent an exception to Epic’s exacting standard?
In an opinion on June 16, the Second Circuit rejected an appeal by lenders contending that Anderson is no longer good law after Epic. Still, the lenders may have won more than they lost, because the appeals court said in strongly worded dicta that the bankruptcy court may not maintain a nationwide class action to rectify violations of the discharge injunction.