Court Has Discretion to Deny Arbitration in Discharge Injunction Case

Posted by NCBRC - October 21, 2019

The Fifth Circuit found that the test it established in In re Nat’l Gypsum Co., 118 F.3d 1059, 1069 (5th Cir. 1997), was still good law notwithstanding the intervening case of Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), and that, under National Gypsum, the bankruptcy properly exercised its discretion to deny the creditor’s motion to compel arbitration in an action alleging discharge injunction violation. Henry v. Educ. Fin. Serv., No 18-20809 (5th Cir. Oct. 17, 2019).

NCBRC, NACBA and Professor Jay Westbrook provided an amicus brief, authored by NACBA member Allan Gropper, in support of the debtor in this case.

Stephanie Henry filed for chapter 13 bankruptcy ten years after entering into a student loan contract with Wells Fargo’s predecessor. After she successfully completed her five-year plan, Wells Fargo sent her a letter containing language to the effect that it was attempting to collect the remaining debt on the loan. Ms. Henry filed an adversary proceeding alleging violation of the discharge injunction. Wells Fargo moved to compel arbitration in accordance with a clause in the lending agreement under which Ms. Henry agreed to have any complaint “arising under or relating to” the debt settled by arbitration. The bankruptcy court denied Wells Fargo’s motion to compel arbitration on the basis that the cause of action did not arise under or relate to the student loan contract. The court certified the case for interlocutory appeal directly to the Fifth Circuit.

The Fifth Circuit accepted the appeal in order to address the interaction between the Federal Arbitration Act and the Bankruptcy Code, noting that the FAA mandates that arbitration clauses be honored according to their terms. But, the court cautioned, that mandate is not without restriction. Where there is a conflict between the FAA and another federal law, the arbitration mandate may be overridden by “contrary congressional command.”

In addressing whether a conflict exists between the FAA and the Code, the court revisited its precedent, In re Nat’l Gypsum Co., 118 F.3d 1059, 1069 (5th Cir. 1997), which held that a bankruptcy court has discretion to deny a motion to compel arbitration when, 1) the action involves statutory rights conferred by the Bankruptcy Code rather than the debtor’s pre-petition rights, or 2) where arbitration would conflict with the purpose of the Code. In National Gypsum, the court found that a bankruptcy court properly declined to enforce an arbitration clause in a discharge injunction case, reasoning that the action involved purely bankruptcy issues as well as the court’s power to enforce its own orders, and arbitration would lead to piecemeal litigation. Wells Fargo argued that the decision in National Gypsum was called into question by the later holding in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018).

One panel of a circuit cannot overturn a decision of another panel based on an intervening Supreme Court case unless such action is “unequivocally directed” by that intervening case. The court found that that was not the case here. National Gypsum was based on language in Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987), where the Court reasoned that Congress’s intent to override the FAA must be “deducible” from the statutory text or legislative history. Epic Systems tightened this language to require a party arguing that the arbitration mandate is overridden by another federal statute must show Congress had a “clear and manifest” intent to displace the FAA.

The court here found that the difference between Epic Systems and McMahon was largely one of tone and did not significantly change the test for resolving a conflict between the FAA and other federal law. Moreover, to the extent that Epic Systems overruled McMahon by its comments disapproving the use of legislative history in resolving the question, the court found that that did not likewise undermine the holding in National Gypsum because National Gypsum did not rely on legislative history. The court concluded that National Gypsum remained good law and the bankruptcy court properly exercised its discretion in denying Wells Fargo’s motion to compel. It affirmed.


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