A district judge in Roanoke, Va., ruled that Bankruptcy Judge Paul M. Black did not abuse his discretion in denying a motion to compel arbitration in a purported class action alleging violations of the automatic stay in consumer chapter 7 and 13 cases.

One debtor had confirmed a chapter 13 plan, and the other had received a chapter 7 discharge. Before bankruptcy, both debtors had signed credit card agreements calling for arbitration of all disputes.

In his March 17 opinion, District Judge Robert S. Ballou said that the lender had “actual knowledge” of the bankruptcies. As class plaintiffs, the two debtors had filed a purported class action in bankruptcy court alleging violations of the automatic stay, because the lender had sent them notices and communications about their accounts.

The lender responded to the complaint with a motion to compel arbitration. Bankruptcy Judge Black denied the motion in an opinion in July 2024. Judge Ballou said that Judge Black found “discretion to deny arbitration of [the debtors’] claims” because “arbitrating enforcement of the automatic stay is contrary to the Bankruptcy Court’s central aims.” Brown v. Goldman Sachs Bank USA (In re Brown), 663 B.R. 449 (Bankr. W.D. Va. July 15, 2024). To read ABI’s report on Judge Black’s opinion, click here.

Reviewing the merits, District Judge Ballou conducted de novo review of the question of whether the bankruptcy court had discretion to deny the arbitration motion and reviewed Judge Black’s exercise of discretion for abuse of discretion.

Although federal law favors enforcement of arbitration agreements, Judge Ballou said that “the preference for arbitration can be superseded by a contrary congressional directive.” Like the bankruptcy court, he cited the Fourth Circuit for the idea that Congress intended for bankruptcy courts to have comprehensive jurisdiction to “‘deal efficiently and expeditiously with all matters connected with bankruptcy estates.’” Moses v. CashCall Inc., 781 F.3d 63, 71 (4th Cir. 2015).

Citing the Supreme Court and the Fourth Circuit, Judge Ballou said that someone aiming to avoid arbitration must show that Congress intended to preclude a waiver of judicial remedies with regard to the statutory rights at issue.

Judge Ballou cited the Third Circuit for the idea that the distinction between core and noncore does not affect the discretion to deny arbitration. Paraphrasing the Fourth Circuit, he said that “courts examine the nature” of both core and noncore claims “to determine whether enforcing arbitration would inherently conflict with the Bankruptcy Code’s purposes.”

The lender, though, conceded that the claims in the debtors’ complaint were constitutionally and statutorily core. Judge Ballou said a bankruptcy court is generally well within its discretion in refusing to arbitrate core claims.

In the case on appeal, Judge Ballou said that the bankruptcy court had properly decided that the debtors’ claims were constitutionally and statutorily core because the automatic stay is a “key part” of the debtors’ “fresh start” and that arbitration would “inherently threaten” the bankruptcy court’s authority to enforce the Bankruptcy Code.

Judge Ballou next undertook de novo review of whether the debtors’ claims inherently conflicted with the purpose of the Bankruptcy Code.

Citing the Fourth Circuit, Judge Ballou said that centrality of administration is a “foundational characteristic” of the Bankruptcy Code and that arbitration “conflicts with centralized decision-making.”

Judge Ballou decided that “arbitrating [the debtors’] claims would inherently conflict with the Bankruptcy Code’s objectives” by undermining the bankruptcy court’s authority to enforce the automatic stay and provide centralized administration. He therefore held that the bankruptcy court “had discretion to deny [the lender’s] motion to compel arbitration.”

Finding that the lender had not identified any clearly erroneous factual findings, Judge Ballou affirmed Judge Black’s denial of the arbitration motion.