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Cases of Interest

2nd Circuit Rules on Arbitration Clause in Bankruptcy Matter

The Debtor filed a class action against a credit card issuer, alleging a violation of the automatic stay. In response, the creditor moved to stay or dismiss the class action so that the matter could be arbitrated, pursuant to the binding arbitration clause found in the credit card account agreement. The bankruptcy court denied the creditor's motion, holding that the "core" nature of an automatic stay violation more appropriately placed it before the bankruptcy court rather than an arbitrator. Upon appeal, the district court agreed. The Court of Appeals for the Second Circuit reversed the district court.

While agreeing that the Debtor's claim was a "core" bankruptcy matter, the Second Circuit found no inherent conflict between the Bankruptcy Code and the Federal Arbitration Act, whose upholding of contractual arbitration provisions posed no jeopardy to the objectives of bankruptcy. Previous appellate reviews by district courts had often found no conflict between the Code's stay provisions and compulsory arbitration, especially when the issues were not central to the Code's purposes and policies, and/or to the distribution of an estate in bankruptcy. The Court pointed out that the Debtor's estate had already been fully administered and her debts discharged. Second, thanks to her decision to proceed in a class action, she distanced her stay violation claim, diluting its relevance to her individual bankruptcy. Third, the Court disagreed that a stay was so closely related to an injunctive order that a bankruptcy court was uniquely and exclusively able to interpret and enforce it.

In sum, the Court acknowledged the importance of the automatic stay, but found no grounds in statute to exempt, categorically, any automatic stay related dispute from resolution by arbitration.

Creditors may now be able to compel a debtor to arbitrate stay violations and possibly other matters rather than allow the debtor to file suit in local bankruptcy courts across the country. Instead of contending with the vastly different results that occur, and the high costs of defending actions in bankruptcy courts, creditors in automatic stay disputes may now be able to take advantage of the predictability and reduced costs arbitration can provide.

MBNA America Bank, N.A. vs Hill, No. 04-2086-BK, 2006 U.S. App. LEXIS 1786 (2d Cir. Jan. 25, 2006).

Bankruptcy Report is produced by Becket & Lee LLP, Attorneys at Law, as a service to our clients. Copyright 2006 by Becket & Lee LLP, except as otherwise noted. Reproduction of this newsletter is strictly prohibited without written permission from the publisher.

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