Bankruptcy courts throughout the country are being presented with the question of whether to enforce arbitration agreements. In the past, bankruptcy courts have found that arbitration agreements are not enforceable when they concern matters considered to be within the jurisdiction of the bankruptcy court. This may soon change as the U.S. Supreme Court has recently issued opinions in non-bankruptcy matters enforcing arbitration agreements. It may just be a matter of time before the analysis used in non-bankruptcy cases gets applied to matters pending before bankruptcy courts.
Arbitration and Bankruptcy, Historically
Bankruptcy courts, for the most part, are reluctant to enforce arbitration agreements based primarily on public policy concerns. The very purpose of the Bankruptcy Code is to allow debtors a fresh start and to equitably distribute the debtor’s non-exempt assets to creditors. As a result, bankruptcy judges are reluctant to grant such authority to arbitrators.
For example, the Fifth Circuit Court of Appeals recently held that a bankruptcy court has discretion not to enforce an arbitration agreement when presented with whether or not to hear a class action suit involving a creditor who had violated the discharge injunction. See Henry v. Educational Finance Service (In re Henry), 18-20809, 2019 BL 399760 (5th Cir. Oct. 17, 2019).
Similarly, the Second Circuit Court of Appeals in One Bank NA v. Anderson (In re Anderson), 884 F.3d 382 (2d Cir. March 7, 2018), cert. denied, One Bank NA v. Anderson, 139 S. Ct. 144, 202 L. Ed. 2d 35 (Oct. 1, 2018), chose not to enforce an arbitration agreement in connection with a class action suit initiated by the debtor alleging that the creditor had violated the discharge inunction.
In Allied Title Lending LLC v. Taylor, 18-845 (E.D. Va. Oct. 22, 2019), the court was asked to enforce an arbitration agreement where the debtor had objected to the lender’s claim and had sought monetary relief and class action status based on the lender charging usurious interest to the debtor and those class claimants similarly situated. What made this case unique was the State’s attorney’s effort to intervene based on the lender’s violation of the State’s consumer finance and usury laws. The court denied the lender’s request to enforce the arbitration agreement finding that even though the debtor was seeking monetary relief, the claims asserted by the debtor were “core” as they impacted the allowability of the lender’s claim. This is notwithstanding the fact that the arbitration clause was broadly worded and could have conceivably included the claims asserted by the debtor.
As for the State’s attorney’s request to intervene, because disallowance of the lender’s claims would prevent the lender from collecting on unlawful interest from similarly-situated bankrupt debtors, the court found it had jurisdiction to permit the intervention.
What’s Ahead?
So, in summary, even though bankruptcy courts are for the most part reluctant to enforce arbitration agreements finding that the underlying claims are essential to carrying out the general purposes of the Bankruptcy Code, eventually the U.S. Supreme Court will be asked to decide these issues. Based on the current composition of the Supreme Court, things may change. Stay tuned.
