Credit One Can't Compel Arbitration With Discharged Debtor

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By Daniel Gill

June 17 — Credit One Bank can't compel arbitration of a putative class action claim filed by a credit card holder for damages arising from the credit card company's alleged violation of the plaintiff's bankruptcy discharge, a district court held June 14 ( Credit One Fin. v. Anderson (In re Anderson), 2016 BL 190875, S.D.N.Y., No. 15-cv-4227 (NSR), 6/14/16 ).

Judge Nelson S. Román of the Southern District of New York denied Credit One's attempt to compel the arbitration of a potential class action filed by a former credit card holder. In the case, the plaintiff sought an award for damages, on behalf of himself and other card-holders similarly situated, against the credit card company for its failure to update credit reports to reflect that the plaintiff class had their credit card debts discharged in bankruptcy.

The court found that compelling arbitration would “necessarily jeopardize the objectives of the Bankruptcy Code” and the bankruptcy courts' right to enforce their own orders.

Violating the Bankruptcy Discharge

Plaintiff Orrin Anderson owed money on his Credit One credit card when he filed for Chapter 7 protection on Jan. 31, 2014. In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors. Subject to certain exceptions, the debtor is awarded a discharge, effectively wiping out dischargeable debts (that is, those debts not subject to an exception).

On May 6, 2014, the debtor received his discharge, effectively erasing the debt he previously owed to Credit One.

After receiving his discharge, the debtor noticed that his credit reports showed the Credit One debt as “charged off” and not that it was discharged in bankruptcy. According to the debtor, he asked Credit One to correct its credit reporting to show the debt was discharged, but the company took no action.

The debtor then moved the bankruptcy court to reopen his case (it was closed after the discharge was granted and the case was otherwise wrapped up) so that he could file suit in the court against the bank for damages that he and other discharged debtors suffered by Credit One's failure to correct the credit reports.

The debtor alleged that the failure amounted to a violation of the injunction created by Section 524 of the Bankruptcy Code (11 U.S.C. §524), and that he was entitled to damages under that statute (as well as under Section 105, which gives bankruptcy courts authority to enter orders “necessary or appropriate to carry out the provisions” of the Bankruptcy Code).

Credit One moved the court to compel arbitration of the dispute under the Federal Arbitration Act (FAA), Title 9 of the U.S. Code. It asserted that its contract with the debtor (and its other card-holders) provided that either party in a dispute can compel mandatory binding arbitration in a dispute and that the FAA required the clause be enforced.

Inherent Conflict With Bankruptcy Code

Even though the FAA establishes a policy favoring arbitration agreements, the bankruptcy court can refuse arbitration under the FAA if it finds that the proposed arbitration “would present a severe, inherent conflict with or necessarily jeopardize the objectives of the Bankruptcy Code,” the district court said.

First, the court said, it must determine if the issue to be litigated is “core” or “non-core” under the Bankruptcy Code. In other words, does the matter arise under the Bankruptcy Code (i.e., it is core), or in the bankruptcy case (in which case it might be non-core). The court does not have discretion to refuse to enforce mandatory arbitration in a non-core matter, the court said.

The court found that an action to enforce the discharge injunction created by Section 524 of the Code is absolutely core. The court quoted the bankruptcy court, which said, “There's nothing more fundamental than the discharge.”

“[O]nly through enforcement of the discharge order can the discharge provided by the Bankruptcy Court provide the debtor with a ‘fresh start,' a central objective to the bankruptcy laws,” the court said.

Due Deference to Bankruptcy Court

Following MBNA America Bank, N.A. v. Hill, 436 F.3d 104 (2d Cir. 2006), the court examined the purposes and objectives of the discharge and whether the debtor still required protection of his discharge. Precluding arbitration was warranted “where the discharge is so fundamentally related to a debtor's fresh start,” the court said.

The court then noted that bankruptcy courts are best suited to interpret their own orders, and these would include the order granting a discharge.

Finally, the court went beyond the Second Circuit's Hill analysis and added that uniformity of applying bankruptcy laws is another basis to support the court's denial of mandatory arbitration. The court noted that as a class action claim, a number of debtors have identical claims as the plaintiff against the same creditor — Credit One. “Given that each individual claim would be subject to separate arbitration, this could create wildly inconsistent results,” the court said.

Because the bankruptcy court properly had discretion to override the arbitration agreement, the court said, it must now “afford that determination due deference, and the Court finds no clear error in that aspect of the Bankruptcy Court's decision.”

What's Next

The court's ruling affirmed the bankruptcy court's order declining to send the matter to arbitration and nothing more. The plaintiff will still have to prove his claim in the adversary proceeding (the lawsuit) pending in the bankruptcy court.

To contact the reporter on this story: Daniel Gill in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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