Court Properly Declined to Compel Arbitration of Educational Loan Issue

Posted by NCBRC - October 23, 2017

Potential discharge of an educational loan is a core bankruptcy proceeding over which the bankruptcy court may exercise jurisdiction despite an arbitration clause in the lending agreement. Navient Solutions v. Farmer, No. 17-764 (W.D. Wash. Oct. 16, 2017).

In her chapter 7 bankruptcy, Janay Farmer sought to discharge a loan she had taken out to finance her post-graduation bar-examination. The lender, Navient, moved to compel arbitration in accordance with the terms of the lending agreement. Reasoning that the issue of treatment of the loan was a core bankruptcy matter, the bankruptcy court found that it had discretion to exercise jurisdiction over the case. In re Farmer, 567 B.R. 895 (Bankr. W.D. Wash. 2017).

On Navient’s appeal, the district court looked to whether the Bankruptcy Code overrides the Federal Arbitration Act in this situation. Relying on Shearson/Am. Exp., Inc. v. McMahon, 482 U.S. 220, 227 (1987), the court articulated three factors to determine whether Congress intended another statute to override the FAA: 1) the language of the later statute, 2) its legislative history, 3) and, in the absence of explicit direction, the existence of an inherent conflict between the newer statute and the FAA.

Finding no explicit indication that Congress intended the Code to supersede the FAA in this context, the court addressed whether there is an inherent conflict between the two statutes. The court rejected Navient’s argument that, since McMahon, the Supreme Court in CompuCredit Corp. v. Greenwood, 565 U.S. 95 (2012), and Am. Exp. Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013), abandoned the inherent-conflict approach in favor of looking only at explicit statutory direction from Congress. The court found these cases (neither of which involved conflict with the Bankruptcy Code) did not apply the factors set forth in McMahon and have not been interpreted by the Ninth Circuit as abandoning the McMahon factors. In fact, in their concurrence in CompuCredit, Justices Sotomayor and Kagan specifically stated that they did not understand the Court’s holding to require explicit preclusion of one statute by another.

The court turned to whether the matter for which Navient sought to compel arbitration—whether the loan should be excepted from discharge as a qualifying education loan pursuant to section 523(a)(8)—was a “core proceeding” in bankruptcy. Finding that discharge of debts is a core bankruptcy proceeding and that allowing arbitration of the issue would conflict with the Code, the court affirmed the bankruptcy judgment.

Farmer WD Wash opinion Oct 2017

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