Business Law

Little v. Career Education Corporation (In re Little) (Bankr. D. S.C.)

The following is a case update written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, analyzing a recent decision of interest:

A bankruptcy court denied a motion to compel arbitration as to claims for nondischargeability of debt and other claims by a consumer against an online university because arbitrating the claims would pose an inherent conflict with the Bankruptcy Code and there was not “clear and unmistakable” evidence of intent to delegate threshold issues to an arbitrator for determination.  Little v. Career Education Corporation aka CEC and Colorado Technical University aka CTU (In re Little), 2020 WL 211467 (Bankr. D. S.C. 2020). 

To view the full opinion, click here. 


Booker T. Little (Little) attended online classes at Colorado Technical University, Inc. (CTU), an online university.  Little filed a chapter 13 bankruptcy case and thereafter filed an adversary complaint against CTU, stating bankruptcy claims for nondischargeabilty of debt pursuant to 11 U.S.C. § 523(a)(8) (undue hardship) and abuse of process pursuant to 11 U.S.C. § 105.  The complaint also included numerous state law claims for negligence, fraud, fraud in the inducement, negligent misrepresentation, fraudulent misrepresentation, breach of contract, unjust enrichment, promissory estoppel and violation of the South Carolina Unfair Trade Practices Act.  CTU filed a motion to dismiss and, alternatively, to compel arbitration based on an enrollment agreement allegedly electronically signed by Little.


The bankruptcy court considered the bankruptcy claims and state law claims separately.  As to the bankruptcy claims, the court cited to Moses v. CashCall, Inc., 781 F.3d 63, 72 (4th Cir. 2015), stating that “bankruptcy courts in their discretion may retain constitutionally core claims if ‘arbitration would pose an inherent conflict with the Bankruptcy Code.’”  In analyzing the § 105 claim, the court determined that “[t]here is little doubt for the Court that delegation to an arbitrator of the bankruptcy court’s § 105 authority would inherently conflict with the Bankruptcy Code” and that it “would undermine the court’s ability to enforce both its orders and the Bankruptcy Code and would ‘strip the courts of their primary enforcement mechanism.’”  The court also found that nondischargeability claims “are listed as core proceeding under 28 U.S.C. § 157 and have been routinely held to be “constitutionally core” by bankruptcy courts, citing to Deitz v. Ford (In re Deitz), 469 B.R. 11, 17-24 (9th Cir. BAP 2020), aff’d 760 F.3d 1038 (9th Cir. 2014).  In addition to the claims as core, the court noted that “such determinations regarding a debtor’s student loan debt have a material effect on the payments under a chapter 13 plan and a debtor’s reorganization and goal of a fresh start”.  The court therefore determined that there was an inherent conflict with the Bankruptcy Code in arbitrating the § 105 and nondischargeability claims.

As to the state law claims, the court considered whether the court or the arbitrator should determine threshold arbitration issues including arbitrability of the claims, framing the issue as whether there is “clear and unmistakable evidence” of agreement to have an arbitrator, rather than a court, decide arbitrability issues, following Simply Wireless v. T-Mobile US, Inc., 877 F.3d 522, 526 (4th Cir. 2017).  The court stated that the Fourth Circuit in Simply Wireless “expressly limited its holding to the context of commercial contracts between sophisticated parties, and by implication appears to have reserved for later judgment whether such an incorporation of arbitration rules would be clear and unmistakable evidence in transactions involving an unsophisticated party.”

The court determined that the arbitration clause in CTU’s enrollment agreement did not contain “explicit and clear language delegating such authority to the arbitrator” and did not “provide any additional and specific language regarding the authority of the arbitrator to decide arbitration issues and is not a separate, independent document.”  It also concluded that the agreement was drafted to be signed by “unsophisticated individuals enrolling in the Defendants’ online university, such that it is likely an adhesion contract.”  Citing to Stone v. Wells Fargo Bank, N.A., 361 F. Supp. 3d 539, 555 (D. Md. 2019), the court determined that the agreement did not satisfy the “clear and unmistakable” test, stating that “[t]his Court agrees with Stone that in the context of an unsophisticated party entering into an adhesion contract that includes an arbitration agreement, the incorporation of a set of arbitration rules does not alone create clear and unmistakable evidence of an intent for an arbitrator to determine threshold arbitration issues.”  The court denied the motion to compel arbitration and set further hearing on factual disputes as to whether the debtor signed the agreement, issues regarding the impact of the debtor’s active duty military status on the agreement, and whether the arbitration clause was unconscionable.

Author’s Comment:

If online colleges or other entities were permitted to force unsophisticated consumers to arbitrate “core” bankruptcy claims, it would not only pose an inherent conflict with the Bankruptcy Code, it would also create the practical issue of a bankruptcy system where arbitrators who may have no background or expertise in bankruptcy law make final determinations that fundamentally alter bankruptcy cases.  There is also a significant issue in permitting arbitrators (many of whom have never served as bankruptcy or district judges) to determine the threshold issue of whether claims should be arbitrated.  Permitting arbitrators to make that decision as to core bankruptcy claims would amount to an abdication of the bankruptcy court’s authority and jurisdiction.

The bankruptcy court’s decision presents a well-reasoned argument against enforcing the arbitration provision in the enrollment agreement both as to core bankruptcy claims and as to state law claims.  Whether arbitration of the bankruptcy claims is appropriate is a more straight-forward issue given the conflict with the Bankruptcy Code.  The state law claims present a closer call.  However, the bankruptcy court rightly focused on the fact that Little was a consumer, the enrollment agreement was not negotiated by two sophisticated parties on equal footing, and the agreement appears to be an adhesion contract that incorporates arbitration rules by reference.  Enforcing arbitration provisions generally does not make sense in such situations, especially where the terms would not be clear to a consumer.  The court’s citation to Stone frames the issue, stating that “[t]he court in Stone noted that nearly every Circuit Court of Appeal that held that incorporation of arbitration rules satisfied the clear and unmistakable standard were addressing agreements involving sophisticated parties, such as organizations, and not unsophisticated individuals” and that “[t]he court noted how unlikely it would be that an unsophisticated party would know what a set of arbitration rules were, and even less so, the specific contents of a particular rule within that set.”

An analysis of issues regarding an arbitration provision entered into by a consumer was recently undertaken by the Fifth Circuit in In the Matter of Willis, 944 F.3d 577 (5th Cir. 2019) with a different result (although in that case, the focus was on two arbitration provisions with conflicting terms and whether there was a meeting of the minds under state law).  In Willis, the Fifth Circuit looked past conflicting arbitration provisions in two agreements, stating “[w]e will not shut our eyes to an agreement that demonstrates a baseline intent to arbitrate just because it contains inconsistent terms about procedural minutiae.”  Willis at 582.  The well-reasoned dissent in Willis noted the issue regarding consumers, stating that applying a presumption of a baseline intent to arbitrate to compel arbitration should be limited to commercial parties and should not include contracts of adhesion.  Willis at 583.

In terms of drafting agreements to make arbitration clauses more likely to be enforced as to state law claims, the court stated that “Defendants, as the drafters of the Enrollment Agreement, ‘can do better’ to ensure that any intent to delegate these determinations to the arbitrator is clear and unmistakable not only for themselves, but also the students enrolling in the Defendants’ schools.”  In footnote 13, the court noted that after the date of Little’s enrollment agreement, CTU clarified in its enrollment agreements that the arbitrator decides threshold issues, and included additional language in all caps near the signature blocks.  The court did not state whether such added language would have been sufficient to have an arbitrator determine the arbitrability of state law claims in this case.

For-profit colleges and financial institutions seeking to enforce arbitration agreements as to nondischargeability and state law claims is an issue that seems to be the subject of numerous decisions by courts with varying results.  Courts generally deny arbitration as to core bankruptcy claims, but often enforce arbitration provisions as to at least some of debtors’ state law claims.  The issue of whether bankruptcy courts, and district courts and circuit courts on appeal, will enforce arbitration of claims brought by individual debtors against for-profit colleges and lenders based on adhesion contracts (and especially ones where the debtor allegedly signed the agreement with electronic signature and with less than clear or conflicting terms) will continue to be a significant issue with a big impact on the outcome of bankruptcy cases involving those issues.

For discussions of other cases dealing with related issues, see:

  • 2019-42 Comm. Fin. News. NL 84
  • 2007 Comm. Fin. News. NL 94
  • 2019-37 Comm. Fin. News. NL 74

These materials were written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, a member of the ad hoc group and the Chair of the CLA Business Law Section, with editorial contributions by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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