Arbitration Issue Goes to Fifth Circuit

Posted by NCBRC - January 18, 2019

The bankruptcy court denied the creditor’s motion to compel arbitration where the debtor’s adversary complaint, based on the creditor’s violation of the discharge injunction, was based on a purely bankruptcy issue. Henry v. Educ. Fin. Serv., No. 13-30519, Adv. Proc. No. 18-3154 (Bankr. S.D. Tex. Oct. 17, 2018).

After Stephanie Henry obtained a chapter 13 discharge, the creditor, Educational Financial Services, initiated collection proceedings against her. She filed an adversary complaint seeking an order that the loan had been discharged, a finding of contempt, and a monetary award. EFS moved to stay the bankruptcy case and compel arbitration under an arbitration clause in the lending agreement.

The question was whether, in this case, the FAA’s mandate compelling enforcement of an arbitration provision was overridden by the Bankruptcy Code. To answer that question, the court had to determine whether the case arose “exclusively under the provisions of the Bankruptcy Code” and whether enforcement of the arbitration clause would create a conflict with the Code. The court found that EFS’s obligation to comply with the discharge order and the statutory discharge injunction arose exclusively out of bankruptcy rather than the lending agreement. It rejected EFS’s “but for” argument that Ms. Henry’s claims would not exist without the underlying lending agreement. The court found Ms. Henry’s claims were not derivative of the pre-petition contract but arose solely out of EFS’s post-discharge conduct.

The court concluded: “For this Court to delegate the enforcement of its order to a non-judicial entity runs counter not only to the Bankruptcy Code but to the very oath administered to every federal judge prior to taking office. 28 U.S.C. § 453.”

EFS filed a petition for direct appeal to the Fifth Circuit where the similar case of Crocker v. Navient Solutions, LLC, No. 18-20254, is currently pending. The Fifth Circuit granted the petition. Educational Financial Services v. Henry, Case No. 18-20809.

Henry Bank SD Tex Oct 2018


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