Arbitration Clause Doesn't Apply to Trustee's Claims

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By Diane Davis

Dec. 14 — A trustee's claim to recover fees a debtor paid for debt resolution services before filing for bankruptcy isn't a breach of contract claim in the guise of an improper fraudulent transfer claim, and the arbitration clause in the debtor's contract didn't apply to the trustee's claim, a district court in Colorado held Dec. 10 (Larson v. Swift Rock Fin., Inc. (In re Craig), 2015 BL 405934, D. Colo., No. 1:15-cv-00674-REB, 12/9/15).

Judge Robert E. Blackburn of the U.S. District Court for the District of Colorado concluded that the trustee's Bankruptcy Code Section 548 fraudulent transfer claim is a claim of the trustee, not a claim of the debtor, and because the trustee isn't a party to the arbitration clause, it doesn't apply to the trustee's claim.

Section 548(a)(1)(B) permits a trustee “to avoid a transfer of an interest of the debtor in property made or incurred within two years before the date of the bankruptcy petition if the debtor ‘received less than a reasonably equivalent value in exchange for such transfer' and (a) the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer; or (b) the debtor was engaged in a transaction for which any property remaining with the debtor was an unreasonably small capital; or (c) the debtor intended to incur, or believed he or she would incur, debts that would be beyond the debtor's ability to pay,” the court said.

The trustee's second claim for relief under § 12-14.5-235, C.R.S., which is part of the Colorado Uniform Debt Management Services Act (CUDMSA), falls within the terms of the arbitration clause; however, enforcement of the arbitration clause would “substantially undermine the orderly, efficient, and effective administration of the bankruptcy estate,” the district court concluded.

The “fundamental purposes of the Bankruptcy Code take precedence over the requirements of the arbitration clause and the Federal Arbitration Act (FAA),” the court said. Thus, the bankruptcy court properly denied the creditor's motion to compel arbitration, the court said.

Arbitration Clause in Contract

Debtor Lu Ann Ratzlaff Craig entered into a contract with Swift Rock Financial, Inc. d/b/a World Law Group, d/b/a World Law Debt (WLD), and Orion Processing LLC, d/b/a World Law Processing (WLP) for debt resolution services.

On the same day, the debtor entered into a second agreement with Global Client Solutions, LLC (Global) for account services. The debtor signed a dedicated account agreement and application with Global that contained an arbitration clause. Under the clause, any dispute between Global and the debtor would be resolved in arbitration.

Under her contract with WLD and WLP, the debtor paid $9,154 in fees. The debtor also paid Global $180 in fees. Later, she closed her account with Global and terminated her relationship. Subsequently, the debtor filed for Chapter 7 protection, in which the debtor's nonexempt assets are liquidated and the proceeds are distributed to creditors.

Chapter 7 trustee Douglas E. Larson filed two claims to recover approximately $9,334 that the debtor paid to WLD, WLP, and Global.

Global moved to compel arbitration of the trustee's claims under the arbitration clause in the contract between Global and the debtor. Global also disputed the allegation that WLD, WLP, and Global “acted in concert” and are joint and severally liable.

No Arbitration for Trustee's Claims

The bankruptcy court denied the motion to compel arbitration, concluding that the case brought by the trustee is “fundamentally a fraudulent transfer claim” under Section 548.

The bankruptcy court determined that the trustee's CUDMSA state law claim wasn't a core proceeding, which under 28 U.S.C. § 157(b) involves administration of the bankruptcy estate and is based on bankruptcy law. Under 28 U.S.C. § 157(c), a bankruptcy judge may hear a proceeding that is not a core proceeding, but is related to a bankruptcy case; however, the judge may not make a final determination, but must submit proposed findings of fact and conclusions of law to the district court.

Neither of the trustee's claims were appropriate for arbitration, the bankruptcy court said, and denied Global's motion to compel arbitration.

Global appealed to the district court, arguing that the trustee's Section 548 claim was really a “garden variety contract claim which should be compelled to arbitration” under the arbitration clause.

Not a ‘Garden Variety Contract Claim.'

The district court disagreed with Global and found that the Section 548 claim was based on allegations that the debtor make a transfer to the defendants within two years of the petition date, the transfer was for less than reasonably equivalent value in exchange, and one or more of the requirements of Section 548(a)(1)(B)(ii) were satisfied.

The court also pointed out that the trustee isn't a party to the arbitration clause asserted by Global. Therefore, the arbitration clause isn't applicable to the Section 548 claim of the trustee, the court said.

Arbitration Undermines Administration of Estate

On the CUDMSA claim, the court determined that the bankruptcy court has discretion to decline to enforce an arbitration provision only if arbitration would conflict with the underlying purposes of the Bankruptcy Code.

The trustee stands in the shoes of the debtor, the court said, and if the debtor were asserting this claim outside of bankruptcy, the claim on its face would fall within the arbitration clause.

The court looked to the nature of the two claims asserted by the trustee and found that there was inherent conflict between arbitration of the CUDMSA claim, and the underlying purposes of the Bankruptcy Code. In this case, the “fundamental purposes of the Bankruptcy Code are paramount to the requirements of the arbitration clause and the FAA,” the court said. According to the court, enforcing arbitration would substantially undermine the orderly, efficient, and effective administration of the bankruptcy estate, and requiring arbitration would deprive the estate, and its creditors of the possibility of any recovery of assets for the estate.

Richard Wayne Epstein and John H. Pelzer of Greenspoon Marder, P.A., Fort Lauderdale, Fla., represented the appellant Global Client Solutions, LLC; and Lars Johnson of Lars Johnson & Associates LLC, Eagle, Colo., represented Chapter 7 Trustee Douglas E. Larson.

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