Anderson v. Credit One Bank, N.A. (In re Anderson), 884 F.3d 382 (2d Cir. 2018) [click for opinion]

Plaintiff was a credit card holder with Credit One Bank, N.A.’s predecessor (the “Bank”). On March 12, 2012, the Bank “charged off” Plaintiff’s outstanding credit card debt; that is, the Bank changed those debts in its books from a receivable to a loss. The Bank then sold Plaintiff’s debt to a third-party buyer, and externally reported the change in the debt’s status as debt which remained unpaid and had been “charged off.”

In January 2014, Plaintiff filed a voluntary Chapter 7 bankruptcy petition with the United States Bankruptcy Court for the Southern District of New York. In May 2014, the bankruptcy court entered an order that discharged all of Plaintiff’s debts and closed his Chapter 7 case. In September 2014, Plaintiff asked the Bank to remove the charge-off from his credit reports on the basis that the bankruptcy had discharged that debt. The Bank refused and, in December 2014, the bankruptcy court permitted Plaintiff to re-open his case in order to pursue the Bank’s “alleged violations of [his] discharge injunction.”

With his bankruptcy case re-opened, Plaintiff filed an amended class action complaint in the bankruptcy court on behalf of himself and others similarly situated. He alleged that the Bank violated 11 U.S.C. § 524(a)(2) by “knowingly and willfully failing to update the credit reports of class members to signify the debts owing to [Bank] have been discharged in bankruptcy.” The Bank moved to stay the bankruptcy proceeding and compel arbitration under the terms of Plaintiff’s cardholder agreement, which stated, in relevant part, that “either [Plaintiff] or [Bank] may, without the other’s consent, require that any controversy or dispute … be submitted to mandatory, binding arbitration.”

The bankruptcy court denied the Bank’s motion to compel arbitration. The district court then affirmed the bankruptcy’s court ruling and the Bank filed a mandatory interlocutory appeal of the issue to the Second Circuit. A unanimous three-judge panel of the Second Circuit affirmed both lower courts’ decisions to deny the Bank’s motion to compel arbitration.

Applying an abuse of discretion standard, the Second Circuit began its analysis by recognizing the federal policy favoring arbitration. This pro-arbitration preference is not, however, absolute and the party opposing arbitration may demonstrate that “Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue.” The Second Circuit determined that the Plaintiff carried his burden in showing an “inherent conflict between arbitration and the Bankruptcy Code,” which requires a court to engage in a:

particularized inquiry into the nature of the claim and the facts of the specific bankruptcy. The objectives of the Bankruptcy Code relevant to this inquiry include the goal of centralized resolution of purely bankruptcy issues, the need to protect creditors and reorganizing debtors from piecemeal litigation, and the undisputed power of a bankruptcy court to enforce its own orders.

The Second Circuit emphasized that debt discharge “is the foundation upon which all other portions of the Bankruptcy Code are built.” Statutory discharge of preexisting debts “allows honest but unfortunate debtors an opportunity to reorder their financial affairs and get a fresh start.” Moreover, such a “fresh start” is only possible if the “discharge injunction crafted by Congress and issued by the bankruptcy court is fully heeded by creditors and prevents their further collection efforts.”

In the Second Circuit’s view, enforcement of the arbitration agreement in this case would interfere with the fresh start bankruptcy promises debtors, which would create an inherent conflict with the Bankruptcy Code. Accordingly, the Second Circuit held that “the bankruptcy court did not abuse its discretion by denying [Bank’s] motion to compel arbitration in this case.”

A version of this post originally appeared in the May 2018 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.

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