by In a lengthy, per curiam opinion, the Fourth Circuit affirmed in part and reversed in part a district court decision declining to enforce CashCall’s notorious arbitration clause. Moses v. CashCall, No. 14-1195 (4th Cir. March 16, 2015). Oteria Moses entered into a lending agreement serviced by CashCall, that had an effective interest rate of 233.10% and included the clause that any dispute under the agreement would be resolved by arbitration conducted by a representative of the Cheyenne River Sioux Tribe applying Indian Tribal law.
When Moses filed for chapter 13 bankruptcy CashCall filed a proof of claim for the debt. Moses filed an adversary complaint seeking: 1) declaratory judgment that the underlying debt agreement was illegal and therefore void; and 2) damages based on CashCall’s conduct in its collection efforts in violation of North Carolina’s Fair Debt Collection laws. CashCall responded with a motion to withdraw its proof of claim, which the bankruptcy court denied, and a motion to dismiss and to compel arbitration in accordance with the underlying lending agreement.
The bankruptcy court found that Moses’ claim seeking declaratory judgment was a core bankruptcy proceeding under section 157(b)(2)(B), as it involved the “allowance or disallowance of claims against the estate.” It denied the motion to compel arbitration with respect to that claim. As to the claim for damages under North Carolina debt collection laws, the bankruptcy court found that it was not a core proceeding and it issued findings of fact and conclusions of law to the district court recommending that the motion to compel arbitration be denied. On CashCall’s appeal, the district court denied leave to appeal the interlocutory order denying its motion to withdraw the claim, affirmed the denial of arbitration with respect to the core claim and denied the motion to compel arbitration with respect to the non-core claim.
Reviewing the relationship between the Bankruptcy Code and Federal Arbitration Act, the circuit court on appeal noted that the party seeking to avoid arbitration must show that Congress intended for conflicting legislation to outweigh the presumption in its favor. To find that intent, courts look to statutory text, legislative history, and whether there is an inherent conflict between arbitration and the underlying purposes of the opposing legislation. Once the requisite intent is found, denial of arbitration remains a matter of judicial discretion.
Judge Niemeyer, writing for majority began with familiar jurisdictional concepts, finding at the outset that Moses’ claim for declaratory judgment was both statutorily and constitutionally core. Going on to weigh the purposes of the FAA and the Bankruptcy Code, the court found that the bankruptcy court did not abuse its discretion in denying arbitration. The fresh start that is a fundamental purpose of bankruptcy is best achieved by efficient and centralized resolution of all claims affecting the estate. Moses claimed that the debt serviced by CashCall was illegal, and therefore resolution of that claim could impact the distribution of assets to other creditors. Referring the claim to “tribal arbitration would substantially interfere with Moses’ efforts to reorganize.” Thus, the majority held that the district court did not err in affirming the bankruptcy court’s decision to retain the declaratory judgment claim.
The claim for damages, on the other hand, while statutorily core under section 157(b)(2)(C) as a counterclaim by the estate against a creditor, was not constitutionally core as it required a determination of whether the loan was serviced in violation of state Debt Collection Act, a determination not necessarily resolved in the claims allowance process. With respect to this issue, Judge Gregory and Judge Davis represented the majority view that the claim should not have been retained by the bankruptcy court.
Judge Gregory wrote that the connection between the non-core damages claim and the core declaratory judgment claim was too attenuated to overcome the presumption in favor of arbitration. A bankruptcy court’s discretion to refuse to send a non-core claim to arbitration is limited. Arbitration must “jeopardize the objectives of the bankruptcy code” to justify refusal to honor an arbitration clause. While the core and non-core claims had the question in common of whether the underlying debt was valid, the non-core claim had the additional element of CashCall’s conduct in collecting on that debt.
Responding to arguments in opposition, Judge Gregory minimized the preclusive effect of an arbitration finding with respect to the validity of the debt, saying that bankruptcy courts have some leeway to determine that effect. He added that “to the extent that any danger of preclusion remains, a court may simply stay arbitration proceedings for some brief period until it has ruled on the underlying core claim.” Finding that the non-core claim was consequential and that the costs or benefits to the estate from resolution of that claim were not so significant as to outweigh the importance of the state claim, the majority found that that claim should have been resolved outside bankruptcy. Turning to the “800 pound gorilla” of the illusory nature of the arbitration agreement itself, Judge Gregory found that the record was not clear on the issue and without “[m]ore fulsome [sic] briefing.” The circuit court could not rely on the conclusion of other courts that these arbitration agreements are mere sham. Judge Gregory concluded that “the refusal to send a non-core claim to arbitration requires more than a finding that arbitration would potentially conflict with the purposes of the Bankruptcy Code. Rather, the conflict must be inherent and ‘sufficient to override by implication the presumption in favor of arbitration.’”
Judge Niemeyer dissented from the finding that the non-core claim should have gone to arbitration. Noting that the distinction between core and non-core is not necessarily dispositive and that courts may consider the connection between the two claims and other factors such as potential change to the debtor’s ability to pay unsecured creditors in her bankruptcy, delays caused by separate litigation over the legitimacy of the arbitration process, potential preclusive effect of non-bankruptcy findings on the bankruptcy court, Judge Niemeyer stated: “I believe that splitting Moses’ closely related claims and sending Moses’ non-core claim to a questionable and perhaps illusory arbitration proceeding would inherently conflict with the purposes of the Bankruptcy Code.”
Judge Niemeyer and Judge Gregory joined in the opinion that the court had no jurisdiction over the claim that CashCall should have been allowed to withdraw its proof of claim thereby rendering the other claims moot. The case went up on appeal under 9 U.S.C. § 16(a)(1)(A), which permits appeal of an interlocutory order denying referral to arbitration. The district court did not accept interlocutory jurisdiction over CashCall’s challenge to the bankruptcy court’s denial of its motion to withdraw its proof of claim. Therefore, the non-final order by the bankruptcy court denying CashCall’s motion to withdraw its proof of claim would not have been properly appealed under either the collateral-order doctrine or under the court’s pendent appellate jurisdiction. The majority noted that permitting CashCall to withdraw its claim would have supported gamesmanship and not served the equitable considerations that bankruptcy courts are beholden to.
Judge Davis’ dissenting opinion rested on disagreement with this finding. He wrote that in the absence of legally cognizable prejudice to Moses, the bankruptcy court should have permitted CashCall to moot the entire conflict by withdrawing its proof of claim. He would have given CashCall leave to appeal the bankruptcy court’s order as to the withdrawal of the claim and the district court’s denial of leave to appeal that order notwithstanding “the odiousness of CashCall’s apparent practice of using tribal arbitration agreements to prey on financially distressed consumers, while shielding itself from state actions to enforce consumer protection laws.” Judge Davis also acknowledged “the underlying motivations of CashCall’s transparently tactical decision to withdraw its proof of claim in this case as a means to pretermit the adversary proceedings.”