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Arbitrating the Discharge

posted by Bob Lawless

The Second Circuit currently has a pending case (Anderson v. Credit One Bank, No. 16-2496) that raises the question of whether an alleged violation of the bankruptcy discharge injunction is subject to a predispute arbitration agreement. Professors Ralph Brubaker and Bruce Markell have joined me on an amicus brief explaining why the answer has to be "no." You can download the brief from SSRN. (UPDATE 3/3: The link was broken but should be fixed now.)

Bankruptcy specialists know the "discharge" means the forgiveness of prebankruptcy debts. The "discharge injunction" comes from section 524 of the Bankruptcy Code, which states that the entry of a discharge shall operate as an injunction against attempts to collect prebankruptcy debts. Indeed, one of the things the brief tries to make clear is that the "discharge" and "discharge injunction" are different concepts. Historically, filing bankruptcy gave rise to a discharge, but there was no enforcement of that discharge in the federal court that issued it. Rather, the debtor could plead the discharge as an affirmative defense in a state-court collection action.

The discharge injunction comes from the Supreme Court's 1934 decision in Local Loan Co. v. Hunt. To shorten a somewhat more complicated story, the Supreme Court ruled that a federal court sitting in bankruptcy could issue an injunction to vindicate the federal bankruptcy discharge. Judicial decisions on bankruptcy injunctions became a quagmire of conflicting opinions and local practices. In 1970, Congress put the discharge injunction into the bankruptcy statute itself. Instead of having to request an injunction, a bankruptcy debtor now received an injunction through operation of the statute. The 1978 Bankruptcy Code continued this innovation that had been adopted just eight years prior. 

The remedy for the violation of an injunction is contempt of court. Whether through a predispute arbitration agreement or any other agreement, the parties to a case cannot strip a court of the power to enforce its own orders. The brief also explains how the bankruptcy discharge is not even a "claim" against which an arbitration agreement can operate. The filing of a bankruptcy petition is the debtor's invocation of federal court process that leads to the federal decree of discharge. No arbitrator or any other tribunal can issue a decree of discharge. This is a blog. For the full analysis, read the brief!

There are hundreds of thousands of bankruptcy filings each year. The discharge injunction lies at the heart of most every one of them. The Second Circuit case is one to watch. A broad appellate-level decision allowing arbitration could undermine the structure created by Congress to give debtors effective relief in bankruptcy.

Comments

Umm, yeah, allowing the defense of discharge to be subject to an arbitration agreement is tantamount to abrogating the discharge for smaller debts. Especially if it is the kind of arbitration agreement that required the consumer to share the costs of the arbitration.

Next thing we'll be seeing peonage contracts with arbitration clauses. Those vultures never stop. Don't believe me?
https://www.bloomberg.com/news/features/2017-03-01/i-m-renting-a-dog

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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