by The bankruptcy court did not abuse its discretion in denying the creditor’s motion to compel arbitration of two counts of the debtor’s adversary complaint where one count sought to disallow the creditor’s claim as based on a contract that violated Virginia’s usury and consumer finance laws and the other count asserted claims for violation of those same laws. Allied Title Lending, LLC v. Taylor, 2019 WL 5406039 (E.D. Va. Oct. 22, 2019) (case no. 3:18-cv-845), appeal filed, Taylor v. Allied Title Lending LLC, Case No. 19-2283 (4th Cir. filed Nov. 15, 2019).
The chapter 13 debtor entered into a credit agreement with Allied Title Lending under which she agreed to pay back a $1,500 loan at an annualized interest rate of 273.75%. Allied filed a proof of claim for $2,756.92 in her bankruptcy, and the debtor filed an adversary complaint alleging, in pertinent part, that the underlying lending agreement was null and void because it violated Virginia’s usury and consumer finance laws. Ms. Taylor sought disallowance of Allied’s claim as well as monetary damages and fees and costs for herself and a putative class of similarly-situated plaintiffs. Allied moved to compel arbitration under the terms of the credit agreement. The Attorney General for the Commonwealth of Virginia then moved to intervene in order to press a claim against Allied for violation of Virginia consumer protection laws. At that time, the commonwealth had already filed a case against Allied in state court alleging that Allied’s open-end credit plan and interest rates violated state laws.
Relying on Moses v. CashCall, 781 F.3d 63 (4th Cir. 2015), the bankruptcy court denied Allied’s motion to compel arbitration. Over Allied’s objection, the court also granted the commonwealth’s motion to intervene. Allied appealed both decisions.
The district court began by recognizing that the Federal Arbitration Act establishes a broad policy in favor of arbitration. On the other hand, Congress intended to give bankruptcy courts jurisdiction over actions connected with bankruptcy estates. In view of these potentially conflicting policies, arbitration may yield when the underlying case involves a constitutionally core bankruptcy action. An action is constitutionally core when it “stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.”
The court found that count II was constitutionally core because the debtor directly attacked the creditor’s proof of claim as being based on a contract that was null and void under the state usury and consumer protection laws. Any decision on the validity of the underlying credit agreement would therefore directly impact the allowability of the creditor’s claims under section 502(b)(1). The fact that the debtor, on behalf of herself and putative class members, sought monetary damages did not alter the core/non-core analysis.
The court found the same was true with respect to count III, even though that count did not involve a bankruptcy proof of claim filing. If Allied’s open-end credit plan was found to violate the state consumer finance laws, the amount to which it would be entitled in the bankruptcy case would be reduced. Even if the open-end credit plan were found not to violate the state law, however, resolution of the further issue of whether Allied’s $100 origination fee separately violates the law would impact the amount of the claim in bankruptcy. Therefore, the court found count III to be a constitutionally core claim.
Having found both claims to be constitutionally core, the court went on to decide whether the bankruptcy court abused its discretion in denying Allied’s motion to compel arbitration. It found no error. When determining whether to grant a motion to compel arbitration, a bankruptcy must consider “whether compelling arbitration for a claim would inherently undermine the Bankruptcy Code’s animating purpose of facilitating the efficient reorganization of an estate through the ‘centralization of disputes concerning a debtor’s legal obligations.’” Here, the bankruptcy court correctly found that, because counts II and III attacked the validity of the underlying credit agreement upon which the creditor’s bankruptcy claim depended, resolution of those counts would also resolve key bankruptcy issues. Thus, arbitration of those claims would conflict with bankruptcy’s animating purpose. Furthermore, retaining the counts in bankruptcy would promote efficiency and eliminate the possibility of inconsistent findings.
The court next addressed the bankruptcy court’s finding that arbitration would infringe upon the Commonwealth of Virginia’s rights. The court noted that the commonwealth could pursue its rights outside of bankruptcy, as it in fact had done prior to the debtor’s adversary complaint, and, therefore, the commonwealth’s rights were not impacted by the arbitration decision to the same extent the debtor’s rights were. Nonetheless, the court agreed with the bankruptcy court’s finding that the interest of consolidation and efficiency favored consolidation of those actions and denial of arbitration with respect to all of them.
In answer to Allied’s challenge to the bankruptcy court’s order permitting the commonwealth to intervene, the court found the commonwealth had standing under the doctrine of parens patriae which contemplates an action of a government entity to protect a quasi-sovereign interest in enforcing the rights of its citizens. It further found that the bankruptcy court had subject matter jurisdiction over the commonwealth’s complaint under section 157, as a case related to an action under Title 11.
The district court affirmed the decision of the bankruptcy court. Allied has filed an appeal to the Fourth Circuit.