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Bankrupt Consumer Arbitration

posted by Bob Lawless

A couple of years ago, I got all exorcised about MBNA v. Hill, 436 F.3d 104 (2d Cir. 2006). The case involved a consumer bankruptcy where MBNA had offset $159 from the consumer's account despite MBNA's admission that it had notice of the bankruptcy case. The consumer brought an action for damages because of MBNA's violation of bankruptcy's automatic stay and styled it as a class action. MBNA invoked the arbitration clause in its account agreement, and the Second Circuit agreed the case had to go to an arbitrator. Because the automatic stay is central to the U.S. bankruptcy court's power to protect the bankruptcy estate and because Hill had the potential to be an important precedent that undermined the bankruptcy court's authority, a few of us signed an amicus brief urging the court to reconsider its decision. The Second Circuit disagreed, and the case still stands.

I have been wondering where things stand with consumer arbitration in U.S. bankruptcy courts. I did a little poking around this morning and found a few reported cases where MBNA had been cited. Most of these are cases where a bankrupt consumer has asserted rights under a consumer protection statute as a counterclaim to the creditor's claim in the bankruptcy case. These are just the reported cases, and my curiosity is not about the law in the books but the the law on the ground. Are institutional creditors aggressively asserting arbitration clauses to avoid the jurisdiction of the U.S. bankruptcy courts? It's not really the assertion of arbitration against consumer protection claims in which I am interested. Rather, I am really curious to know whether institutional creditors are using arbitration in an attempt to avoid core bankruptcy procedures like the automatic stay or the claims resolution process. Comments are open.


I have not seen one case in 14 years that fits the bill. Southern District of Texas Corpus Christi Div. I work for a volume consumer BK firm.

In Merrill v. MBNA, et al, 343 B.R. 1 (Bankr. D.Me. 2006), the court refused to enforce arbitration re: alleged violations of the automatic stay, but did enforce the clause re: alleged violations of state and federal consumer protection statutes. Result was "fractured" litigation, but that result would be tolerated where to do otherwise would conflict with the essential bankruptcy protections intended to be enforced and safeguarded by the bankruptcy court. The opinion expressly rejects the 2d Circuit's holding in Hill.

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