Bankruptcy Discharge and Arbitration:

11 May Bankruptcy Discharge and Arbitration:

So you got a discharge, none of your assets were taken, and now you want to pursue a previous creditor for collection violations which occurred prior to filing. Maybe there was an FDCPA or other state UDAP claim. Can you do it? Yes, as long as you listed those claims on your schedules as assets.

But even if you later pursue those creditors, watch out for their motion to compel arbitration! Nevertheless, although they may attempt to halt your lawsuit, the bankruptcy discharge may actually be your best weapon to attack the motion to compel arbitration. Below are two arguments to use arising directly from the discharge injunction to deny arbitration.

1) The Bankruptcy Discharge Makes It Impossible For The Creditor To Prove the Existence Of An Enforceable Arbitration Agreement.

The debtor/creditor relationship changes after discharge:
“The very purpose of bankruptcy is to modify the rights of debtors and creditors.” Phillips v. Congelton, L.L.C. (In re White Mountain Mining Co., L.L.C.), 403 F.3d 164, 169 (4th Cir. 2005)(quoting 1 Collier on Bankruptcy, P 3.02 [2](15th ed. rev. 2005)).
Accordingly, any arbitration agreement between debtor and creditor has been permanently modified by the bankruptcy discharge. Specifically, the agreement has been rendered unenforceable and to maintain otherwise violates the Discharge Injunction of 11 USC 524.
Simply put, to compel a debtor to arbitrate pre-bankruptcy claims against a creditor is “an employment of a process to offset the discharged debt as a personal liability of the debtor.” Such an act directly violates the discharge injunction of 11 USC 524 which provides as follows:
§ 524. Effect of discharge
(a) A discharge in a case under this title–
(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived;
In most cases involving issues of personal injury, emotional distress, harassment, and unlawful collection conduct, an arbitration award before a attorney experienced in the specific industry upon which the lawsuit is brought, will not be as significant as a jury verdict. Moreover, arbitration awards tend to be much lower than jury verdicts, because arbitrators often favor companies that will provide them future business.
Additionally, the attempted enforcement of the pre-petition arbitration agreement is an inherent part of the original debt. Under 11 USC 101(12), the term “debt” means “liability on a claim.” So the creditor is making a claim under the arbitration agreement to trigger rights to payment in the arbitration proceeding, contrary to the bankruptcy discharge. The creditor would be attempting to subject the debtor to this liability. Such a motion to compel directly violates 11 USC 524 which prohibits the collection or recovery of any such “claim liabilities.”
To illustrate, a creditor’s attempted enforcement of an arbitration agreement might subject the debtor to the following liabilities on the discharged claim:
1) Arbitrator fees,
2) The lack of appeal,
3) The lack of motions for a new trial, judgments notwithstanding the verdict, and other proceedings.
4) “Single arbitrator” versus a jury.
5) The filing of the arbitration claim outside of the debtor’s county of residence.
Case law recognizes the un-enforceability of agreements in discharged debt. As the court in In re Jones, 6 B.R. 336 at 338, 1980 Bankr. LEXIS 4304, 6 Bankr. Ct. Dec. (LRP) 1115 (Bankr. S.D. Ohio 1980) stated concerning a pre-petition contract:
“The contract between the parties is completely discharged and invalidated..”
Moreover, the Court in Cont’l Airlines, Inc. v. E. Pilots Merger Comm., Inc. (In re Cont’l Airlines, Inc.), 484 F.3d 173, 2007 U.S. App. LEXIS 9299,(3d Cir. Del. 2007), specifically found an arbitration agreement unenforceable as a result of the discharge:
As we have discussed, Eastern’s pilots sought to resume arbitration under the CBA. They did so in spite of our rulings that all claims based on the CBA had been discharged in Continental’s bankruptcy. Id at 183.
This novel theory is essentially a claim seeking to remedy a breach of Continental’s duty under the CBA. We have already determined that all such claims were discharged in bankruptcy, so Eastern’s pilots were rightly enjoined from pursuing one. Id at 185.
2. The Arbitration Agreement Was Never Reaffirmed.
The Bankruptcy Code specifically codifies the enforceability of agreements related to claims dischargeable in bankruptcy, known as “reaffirmation agreements.” In doing so, the Bankruptcy Court plays a paternal role in making sure that debtors are financially capable of keeping certain debts and understanding the reaffirmation terms.
This protection was recently enhanced under the Bankruptcy Abuse Prevention Consumer Protection Act of 2005, (“BAPCPA”) wherein the Bankruptcy Code added a whole new series of provisions with respect to protecting debtors from reaffirmation agreements. Significantly, the new laws now require a mandatory court hearing, presumptions of undue hardships, and a laundry list of disclosures. Many attempted reaffirmation agreements are now routinely denied in most bankruptcy courts.
Notwithstanding, in order for the arbitration agreement to survive the Bankruptcy Discharge, the debtor and creditor would have had to have met all the requirements of 11 USC 524(c) to create an enforceable reaffirmation agreement:
(c) An agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, only if–
(1) such agreement was made before the granting of the discharge under section 727, 1141, 1228, or 1328 of this title [11 USCS § 727, 1141, 1228, or 1328];
(2) the debtor received the disclosures described in subsection (k) at or before the time at which the debtor signed the agreement;
(3) such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that–
(A) such agreement represents a fully informed and voluntary agreement by the debtor;
(B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and
(C) the attorney fully advised the debtor of the legal effect and consequences of–
(i) an agreement of the kind specified in this subsection; and
(ii) any default under such an agreement;
(4) the debtor has not rescinded such agreement at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim;
(5) the provisions of subsection (d) of this section have been complied with; and
(6) (A) in a case concerning an individual who was not represented by an attorney during the course of negotiating an agreement under this subsection, the court approves such agreement as–
(i) not imposing an undue hardship on the debtor or a dependent of the debtor; and
(ii) in the best interest of the debtor.
(B) Subparagraph (A) shall not apply to the extent that such debt is a consumer debt secured by real property.
So unless an enforceable reaffirmation agreement was entered into, the arbitration agreement between the defendant and creditor is no longer enforceable pursuant to 11 USC 524(c).
Hopefully, the forgoing can be used should any creditors discharged in bankruptcy attempt to bring a motion to compel arbitration.
Written by Michael G. Doan
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