The following is a case update written by Corey R. Weber, a member of the ad hoc group of the California Lawyers Association’s (CLA) Business Law Section, analyzing a recent decision of interest:
The Fifth Circuit affirmed the bankruptcy court’s order denying a motion to compel arbitration in an adversary proceeding to discharge student loan debt following completion of a chapter 13 plan, determining that bankruptcy courts continue to have discretion to deny motions to compel arbitration regarding discharge injunctions after the Supreme Court’s opinion in Epic Systems Corp. v. Lewis, — U.S. –, 138 S.Ct. 1612, 200 L.Ed.2d 889 (2018). Henry v. Educational Financial Service (In re Henry), 941 F.3d 147 (5th Cir. 2019). To view the full opinion, click here.
Facts: Debtor Stephanie Marie Henry (Henry) filed a chapter 13 bankruptcy case and Educational Financial Service, a division of Wells Fargo Bank, N.A. (Wells Fargo), filed a proof of claim in the case based on Henry’s student loan debt. Henry made payments to creditors as part of a chapter 13 plan and the bankruptcy court entered a discharge order.
Following the discharge order, based on correspondence from Wells Fargo regarding the student loan debt, Stephanie filed an adversary proceeding in her bankruptcy case against Wells Fargo, claiming that it violated the discharge order pursuant to 11 U.S.C. § 524(a)(2). Following the filing of the adversary complaint, Wells Fargo filed a motion to compel arbitration. The bankruptcy court denied the motion because the claims arose pursuant to the Bankruptcy Code and the discharge order and did not arise based on the loan agreement. The Fifth Circuit heard the matter as an interlocutory appeal pursuant to 28 U.S.C. § 158(a)(3) and (d)(2)(A), but chose to publish its decision.
Reasoning: Citing to In re Nat’l Gypsum Co., 118 F.3d 1056, 1059 (5th Cir. 1997) and In re Gandy, 299 F.3d 489, 495 (5th Cir. 2002), the Fifth Circuit reiterated that bankruptcy courts may decline to enforce arbitration provisions when: (1) “the proceeding must adjudicate statutory rights conferred by the Bankruptcy Code and not the debtor’s prepetition legal or equitable rights”; and (2) “only if requiring arbitration would conflict with the purposes of the Bankruptcy Code.” The Fifth Circuit also stated that in the National Gypsum case, “we held that bankruptcy courts need not enforce agreements to arbitrate whether a creditor’s efforts to collect a debt violated a discharge order” since it is based on the Bankruptcy Code at 11 U.S.C. § 524(a).
Wells Fargo argued on appeal that National Gypsum did not remain good law in light of Epic Systems Corp. v. Lewis, — U.S. –, 138 S.Ct. 1612, 200 L.Ed.2d 889 (2018). The Fifth Circuit held that:
Far from unequivocally directing us to overrule National Gypsum, Epic Systems shows that National Gypsum’s doctrinal foundation, i.e., McMahon, remains sound. For one thing, Epic Systems cites McMahon for support. 138 S.Ct. at 1627. For another, McMahon and Epic Systems apply essentially the same tests for determining whether a statute overrides the FAA’s command to enforce arbitration agreements according to their terms.
The issue raised by Wells Fargo was that Epic Systems rejected the use of legislative history, and legislative history was relied on in McMahon. The Fifth Circuit rejected that argument, holding that “… National Gypsum did not rely on legislative history. Instead, in determining whether the FAA’s requirements were overridden, National Gypsum looked to the purposes of the Bankruptcy Code” and “statutory purpose remains a valid tool for determining whether a given statute displaces the FAA.” The Fifth Circuit concluded that “National Gypsum’s application of McMahon remains good law following Epic Systems.”
Author’s Comment: The Fifth Circuit’s opinion in In re Henry focused on whether Epic Systems changed whether bankruptcy courts have discretion to deny motions to compel arbitration regarding the discharge injunction. Other recent decisions also discuss the fundamental importance of discharge in bankruptcy proceedings. A similar decision was recently reached in regard to a motion to compel arbitration related to the discharge of law school loan debt. In Golden v. JP Morgan Chase Bank, et al. (In re Golden), 587 B.R. 414 (Bankr. E.D. N.Y. 2018), the bankruptcy court, citing to the Second Circuit opinion in Anderson v. Credit One Bank, N.A. (In re Anderson), 884 F.3d 382, 388 (2d Cir. 2018), held that “[h]ere, as in In re Anderson, compelling arbitration of Ms. Golden’s claims for violation of the discharge injunction would create an inherent conflict with the Bankruptcy Code.” The decision in Golden referred to the “ability to achieve a fresh start” and that arbitration “would inherently conflict with the Bankruptcy Code’s objectives of providing a fresh start.”
It is not surprising that bankruptcy courts are rejecting arguments regarding arbitration of issues related to the discharge injunction. As a more recent decision in the Golden bankruptcy case colorfully puts it, “[a]s one court recently observed, “[b]ankruptcy without the discharge is like a car without an engine; a useful tool rendered ineffective.” Golden v. JP Morgan Chase Bank, et al. (In re Golden), 596 B.R. 239, 272 (Bankr. E.D. N.Y. 2019), citing to Roth v. Butler University (In re Roth), 594 B.R. 672, 788 (Bankr. S.D. Ind. 2018). Given the fundamental importance of discharge in the Bankruptcy Code, holdings similar to In re Henry and Golden are likely to continue in cases regarding denial of motions to compel arbitration related to the discharge of student loan debt.
For discussions of other cases dealing with related issues, see:
- 2007 Comm. Fin. News. 94.
These materials were written by members of the California Lawyers Association Business Law Section for the Commercial Finance Newsletter, published weekly on Westlaw. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further distributed without the consent of Thomson Reuters.