Arbitration in Bankruptcy -- Discharge, the Easy Case

Now that the major work of the ABI Commission on Consumer Bankruptcy is done, I seem to have this thing called "time" again. One of the topics that I have been wanting to post about is arbitration in bankruptcy. If I follow through on my intentions, this will be the first of a few posts on arbitration in bankruptcy.

Arbitration has come to the bankruptcy courts. In the coming years, how the Federal Arbitration Act intersects with the Bankruptcy Code will become an increasingly prominent issue. What I want to talk about in this post is arbitration of a violation of the discharge injunction itself. In the typical factual set-up, a debtor alleges a violation of the discharge injunction, and the creditor moves to send the question to an arbitrator under a predispute arbitration clause, almost always embedded in a form contract. Given the ubiquity of these form contracts in consumer transactions, the only thing at stake is the effectiveness of the consumer bankruptcy system.

We can first exclude one approach to the topic that I occasionally see. It goes something like this. The Supreme Court keeps sending disputes to arbitration and thus has signaled repeatedly it favors arbitration. Therefore, the Court would hold that bankruptcy disputes can be arbitrated. This is not how law works. The Court's tendencies are not "law." One of the Supreme Court justices has famously declared he favors a certain malted beverage, but that hardly makes it the drink of the land (although I also would not be against making it so).

An analysis that actually does come from the Supreme Court's case law is that a court should order arbitration unless (i) there is evidence of congressional intent under the "other" law "to prohibit waiver of the judicial forum" or (ii) that the law presents "an inherent conflict" with the Federal Arbitration Act. This analysis tends to come down to whether the "other" law is important enough to override the Federal Arbitration Act. Parties have argued that the purpose of various employment laws, consumer laws, and securities laws would be eviscerated if disputes under these laws had to go to arbitration. All of those arguments have fallen short at the Supreme Court. Maybe bankruptcy will be the exception that proves the rule, but that is not the argument I want to explore when it comes to the bankruptcy discharge.

As I explained more fully in a post two year ago, the discharge is inherently nonarbitrable. A bankruptcy petition initiates a process from which the discharge flows. A creditor can no more ask for arbitration of the discharge than it can ask for arbitration of the petition itself. Last year, the Second Circuit held exactly that in a case called Credit One v. Anderson. In its opinion, the court cited an amicus brief from Ralph Brubaker, Bruce Markell, and me that provides a more formal legal analysis than either you or I want to see in a blog post. The discharge is enforced through a court injunction, which only the court has the authority to enforce. The injunction's locus in section 524 of the Bankruptcy Code is beside the point, as both the brief and my last blog post detail.

The discharge is the easy case. The automatic stay likewise is a pretty clear case for nonarbitrability. Dischargeability of individual debts is harder, and I am still thinking that one through. The road to bankruptcy court may be paved with good intentions, but my intent is to post on these other issues in the near future.