Discharge of the credit card debts did not render the arbitration clause of the credit card agreement unenforceable and, where the clause was valid and not in conflict with the Code, the credit card companies’ motion to compel should have been granted. Belton v. GE Capital Consumer Lending Inc., No. 15-1934, consolidated with In re Bruce, No.15-3311 (S.D. N.Y. Oct. 14, 2015).
Nyree Belton had a credit card account with GE Capital Retail Bank (GE), and Kimberly Bruce with Citigroup Inc. and Citibank, N.A. (Citi). Both credit agreements provided that all claims relating to the accounts were subject to binding arbitration. Both agreements also included procedures for card holders to follow if they believed the lenders had made inaccurate credit reports. Both Belton and Bruce filed chapter 7 bankruptcy. Both obtained a discharge of their credit card debts. When the debtors later received their credit reports, both debts were listed as “charged off,” rather than discharged in bankruptcy.
The debtors were permitted to reopen their bankruptcy cases and they filed putative class actions alleging that the policy and practice of listing discharged debts as “charged off,” violates the discharge injunction, section 524(a)(2), by applying pressure on debtors to repay discharged debts. The companies moved to compel arbitration and stay the bankruptcy proceedings. While the motion was pending, GE and Citi had both debts removed from the debtors’ credit reports. The bankruptcy court denied the motions and the Second Circuit denied GE and Citi’s petitions for direct appeal.
The Federal Arbitration Act (FAA) provides, in relevant part: “A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.
On appeal, the district court outlined the considerations applicable to a motion to compel arbitration as: “’(1) whether the parties have entered into a valid agreement to arbitrate, and, if so, (2) whether the dispute at issue comes within the scope of the arbitration agreement.’ In re Am. Express Fin. Advisors Secs. Litig., 672 F.3d 113, 128 (2d Cir. 2011). And when any of claims at issue arise under a federal statute, the court must also determine whether Congress intended such federal statutory claims to be arbitrated, and whether arbitration would ‘prevent the effective vindication of [the] federal statutory right.’ Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2309-10 (2013).”
The debtors argued that the arbitration clauses were valid initially, but when they obtained their discharges in bankruptcy all the terms of the credit card agreement, including the arbitration clauses, were rendered unenforceable. The court disagreed noting that the Supreme Court in Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63 (2010), specifically found that a court may enforce an agreement to arbitrate even though the contract in which the clause is contained is under attack as a whole. Likewise, in MBNA America Bank, N.A. v. Hill, 436 F.3d 104 (2d Cir. 2006), the Second Circuit enforced an arbitration clause even though the plaintiff had already been granted a discharge. Based on these cases, where the arbitration clauses are otherwise valid, the court found the debtors’ discharge could not be the basis for declining to enforce them.
The debtors next argued that the terms of the arbitration clauses were inapplicable to their cases because those clauses refer to disputes between the parties to the contract while the complaint, as an action for contempt, presented claims between the bankruptcy court and the credit card companies. The court rejected this approach, finding that it must look beyond the legal claims to the factual basis for the complaint to determine whether the arbitration clauses apply. Here, the complaint went to the credit card companies’ failure to give correct information to the credit reporting agencies. Because this contingency was contemplated in both credit agreements, the claims were within the scope of the agreement and the arbitration clause applied.
The court turned next to the issue of whether section 524 precluded application of the FAA, noting that arbitration clauses are favored under the law. The appropriate question was whether “the statute evinces Congress’ intent to have courts, not arbitrators, decide claims arising under the statute.” The court adopted the debtors’ approach, based on interpretation of Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987), for determining whether arbitration was precluded by the Bankruptcy Code in this case, finding that the determination should be based on the text and legislative history of the Code and whether there is an inherent conflict between the two federal statutes. The court thus rejected the companies’ contention based on CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012), that mere silence with respect to the preclusive effect of the Code meant that Congress did not intend such preclusion. Turning to the text of the Code the court found that arbitration was not explicitly precluded. It also found that 28 U.S.C. section 1334 does not vest exclusive jurisdiction over bankruptcy matters with the federal court unless the claims arise under section 327.
As to whether there was an inherent “severe” conflict between the FAA and the discharge injunction, the court found there was not. The court looked at the specific facts and circumstances of the bankruptcy case to determine whether arbitrating the claims would “necessarily and seriously jeopardize the Code’s objectives” of centralizing bankruptcy issues, protecting creditor and debtors from piecemeal litigation, and honoring the bankruptcy court’s power to enforce its own orders. The court found that enforcing an arbitration clause does not undermine the debtor’s right to a fresh start, it merely permits that right to be enforced in a different forum. The court distinguished the case relied on by the bankruptcy court finding that “under [MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104 (2d Cir. 2006)], arbitration of claims under the Bankruptcy Code is required when arbitration would not interfere with or affect the distribution of the estate or would not affect an ongoing reorganization, as was the case there.”
The court found further support for its conclusion in the fact that the debtors attempted to bring their claims as class actions. If the claims were amenable to class action treatment, they were not sufficiently integral to either of the debtor’s actual bankruptcy cases to render arbitration inherently conflicting. Also, the court found that a discharge order was not the type of order that required interpretation by the court that issued it, but could be interpreted by an arbitration panel.
The court dismissed the debtors’ argument that permitting their complaint to go to arbitration would result in piecemeal litigation because the trustee, who was involved in the bankruptcy case, could not intervene in arbitration. The court found that, in fact, the trustee was involved in the bankruptcy case but not the adversary proceeding and therefore, the separation of the trustee’s action from that of the debtors’ was a fact in either forum.
Finally the court turned to whether requiring the debtors to arbitrate their claims would result in denial of “effective vindication” of their rights, finding that it would not. This public policy doctrine was established in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 624 n.13 (1985), in acknowledgement of the fact that arbitration may operate as a prospective waiver of a complainant’s statutory rights. The district court acknowledged that if arbitration would be prohibitively expensive to the objecting party, it could be deemed to deny the effective vindication of statutory rights, but it found that mere “risk” was insufficient. In this case the debtors failed to show “likelihood” that the costs of arbitration would preclude vindication of their rights under the Code. Where the parties consented by agreement to arbitration and the urgency of their claims had been eliminated by the companies’ removal of the offending credit reports, the court found that they could effectively vindicate their rights through arbitration.
This decision was overturned upon motion for reconsideration after the Second Circuit decided the nearly identical case of Anderson v. Credit One Bank, N.A. (In re Anderson), 884 F.3d 382 (2d Cir.), cert. denied, 139 S. Ct. 144 (2018). Bruce v. Citigroup Inc., No.15-3311, Belton v. GE Capital Consumer Lending, Inc. No. 15-1934 (S.D. N.Y. March 4, 2019). The Anderson court found that there was an “inherent conflict” between the Federal Arbitration Act and the Bankruptcy Code. The Anderson court then applied the test set forth in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987), for addressing conflicts between the FAA and other federal statutes. It found that: “(1) the discharge injunction is ‘integral’ to the bankruptcy process; (2) ‘the claim [concerns] an ongoing bankruptcy matter that requires continuing court supervision;’ and (3) ‘the equitable powers of the bankruptcy court to enforce its own injunctions are central to the structure of the Code.’” Id. at 390. Relying on these findings, the Anderson court held that the Code displaced the FAA and denied the creditor’s motion to compel.
BeltonBruce SD NY on reconsideration March 2019
Tags: arbitration, discharge injunction
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