Second Circuit Finds Arbitration Conflicts with Discharge Injunction

Posted by NCBRC - March 9, 2018

Arbitration of the debtor’s claim for violation of the discharge injunction presented an inherent conflict with the Bankruptcy Code and the bankruptcy court did not abuse its discretion in refusing to compel arbitration. Anderson v. Credit One Bank, No. 16-2496 (2d Cir. March 7, 2018).

Credit One charged off Orrin Anderson’s credit card debt, sold the account to a debt buyer, and reported the default to the major credit reporting agencies. After Mr. Anderson obtained a chapter 7 discharge, Credit One refused to change the credit report to reflect the discharge. Mr. Anderson reopened his bankruptcy and filed a class action suit complaining that Credit One’s inaction with respect to his credit reports and those of other putative class members violated section 524(a)(2). The bankruptcy court rejected Credit One’s efforts to enforce the arbitration clause in the credit card agreement. On Credit One’s interlocutory appeal, the district court affirmed. In re Anderson, 553 B.R. 221 (S.D. N.Y. 2016).

On appeal to the Second Circuit, the parties agreed that the issue was a “core proceeding” and the court advanced to the next inquiry: whether Congress intended to make the question of violation of the discharge injunction non-arbitrable. Because the parties did not argue that legislative history or statutory text resolved the issue, the court went on to determine whether there was an irreconcilable conflict between arbitration in this case and the purposes of the Code.

Here, the court found that access to a fresh start was central to bankruptcy and that discharge was the “foundation upon which all other portions of the Bankruptcy Code are built.” The court relied on three conclusions to find that arbitration of Mr. Anderson’s claim would “seriously jeopardize” a core bankruptcy proceeding: “1) the discharge injunction is integral to the bankruptcy court’s ability to provide debtors with the fresh start that is the very purpose of the Code; 2) the claim regards 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.”

The court distinguished MBNA America Bank, N.A. v. Hill, 436 F.3d 104 (2d Cir. 2006), where the putative class members were debtors who had claims based on violation of the automatic stay in bankruptcy cases that had been fully administered and closed. The court was persuaded that, even though the automatic stay was a core proceeding in bankruptcy, once the debtors’ estates had been closed, resolution of the issues involved in the stay violation action would no longer impact the bankruptcy. In contrast, where, as here, the issue involved violation of the discharge injunction, the debtors’ fresh start was under siege rendering ongoing bankruptcy court supervision necessary.

The court concluded that, in light of the inherent conflict between the arbitration clause in the credit card agreement and the Code’s discharge injunction, the bankruptcy court did not abuse its discretion when it declined to compel arbitration.

Anderson 2d Cir Opinion March 2018

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